UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                                    FORM 10-K/A-2
               [ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                                     OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal year ended: September 30, 1997

                                       OR

          [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                  For the transition period from ______to_____

                         Commission file number 0-18083

                             WILLIAMS CONTROLS, INC.
             (Exact name of registrant as specified in its charter)


               Delaware                                          84-1099587
     ------------------------------                          -------------------
     State or other jurisdiction of                           (I.R.S. Employer
     incorporation or organization)                          Identification No.)


          14100 SW 72nd Avenue
            Portland, Oregon                                        97224  
 ---------------------------------------                         ----------
 (Address of principal executive office)                         (zip code)

               Registrant's telephone number, including area code:

                                 (503) 684-8600

           Securities registered pursuant to Section 12(b) of the Act:

                                      None

           Securities registered pursuant to Section 12(g) of the Act:

                          Common Stock ($.01 par value)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  Registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                                (1) Yes X No____

                                (2) Yes X No____

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of Registrant'  knowledge,  in definitive  proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

As of December 31, 1997,  17,782,040 shares of Common Stock were outstanding and
the  aggregate  market value of the shares  (based upon the closing price of the
shares on the  NASDAQ  National  market)  of  Williams  Controls,  Inc.  held by
nonaffiliates was approximately $29,800,000.

                       Documents Incorporated by Reference

Portions  of the  definitive  proxy  statement  for the 1998  Annual  Meeting of
Stockholders  to be filed not later than  January 28, 1998 are  incorporated  by
reference in Part III hereof.

<PAGE>


                             Williams Controls, Inc.
                             Index to 1997 Form 10-K



Part I                                                                     Page
     Item 1.   Description of Business                                      2-7
     Item 2.   Properties                                                     8
     Item 3.   Legal Proceedings                                              8
     Item 4.   Submission of Matters to a Vote of Security Holders            8


Part II
     Item 5.   Market for Registrant's Common Equity and Related 
               Stockholder Matters                                            9
     Item 6.   Selected Financial Data                                       10
     Item 7.   Management's Discussion and Analysis of Financial 
               Condition and Results of Operations                        11-18
     Item 8.   Financial Statements and Supplementary Data                19-48
     Item 9.   Changes in and Disagreements with Accountants on
               Accounting and Financial Disclosure                           49


Part III
     Item 10.  Directors and Executive Officers of the Registrant            49
     Item 11.  Executive Compensation                                        49
     Item 12.  Security Ownership of Certain Beneficial Owners 
               and Management                                                49
     Item 13.  Certain Relationships and Related Transactions                49


Part IV
     Item 14.  Exhibits, Financial Statement Schedules and 
               Reports on Form 8-K                                           49


Signatures                                                                   50



                                       1
<PAGE>


                             WILLIAMS CONTROLS, INC.


                                    Form 10-K


                                     Part I


Cautionary Statement: This report contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements include, without limitation, those statements relating to development
of new products, the financial condition of the Company, the ability to increase
distribution  of the Company'  products,  integration of businesses the Company
acquires,  disposition  of any current  business of the Company,  including  its
Kenco division. These forward-looking statements are subject to the business and
economic risks faced by the Company.  The Company's actual results could differ
materially  from those  anticipated  in these  forward-looking  statements  as a
result of the factors described above and other factors  described  elsewhere in
this report.


ITEM 1. DESCRIPTION OF BUSINESS (Dollars in thousands)


Williams  Controls,  Inc.,  including its  wholly-owned  subsidiaries,  Williams
Controls Industries, Inc. ("Williams");  Aptek Williams, Inc. ("Aptek"); Premier
Plastic Technologies,  Inc. ("PPT");  Williams Automotive,  Inc.; GeoFocus, Inc.
("GeoFocus");   NESC  Williams,  Inc.  ("NESC");  Williams  Technologies,   Inc.
("Technologies");  Williams  World Trade,  Inc.  ("WWT");  Kenco/Williams,  Inc.
("Kenco");  Techwood Williams, Inc. ("TWI");  Agrotec Williams, Inc. ("Agrotec")
and its 80% owned  subsidiaries  Hardee Williams,  Inc.  ("Hardee") and Waccamaw
Wheel Williams, Inc. ("Waccamaw") is hereinafter referred to as the "Company" or
"Registrant."



General


The Company is a Delaware  corporation  formed in 1988.  The  Company's  primary
business  segment was founded by Norman C.  Williams in 1939 and acquired by the
Company in 1988. The Company's  operating  subsidiaries,  which are all Delaware
corporations except GeoFocus, Inc. which is Florida corporation, are as follows:
 

Williams  Controls  Industries,   Inc.:  Manufactures  vehicle  components  sold
primarily in the transportation industry.


Aptek  Williams,  Inc.:  Develops and  produces  sensors,  microcircuits,  cable
assemblies  and other  electronic  products for the  telecommunications  and the
transportation  industry,  and conducts  research and development  activities to
develop commercial  applications of sensor related products for the subsidiaries
of the Company.


Premier Plastic  Technologies,  Inc.:  Manufactures  plastic  components for the
automotive industry and manufactures  prototype and production molds using rapid
prototyping processes.


NESC  Williams,  Inc.:  Installs  conversion  kits  to  allow  vehicles  to  use
compressed natural gas and provides natural gas well metering services.


Williams  Automotive,  Inc.:  Markets the Company's  products to the  automotive
industry.


GeoFocus,  Inc.: Develops train tracking and cyber-farming  systems using global
positioning systems ("GPS") and geographical information systems ("GIS").


Williams  Technologies,  Inc.:  Supports  all  subsidiaries  of the  Company  by
providing   research  and   development   and  developing   strategic   business
relationships to promote "technology partnering."



                                       2
<PAGE>

Williams  World Trade,  Inc.:  Located in Kuala  Lumpur,  Malaysia,  WWT manages
foreign sourcing for all subsidiaries of the Company, affiliates and third party
customers.


Kenco/Williams,  Inc.: Manufactures,  assembles,  packages and distributes truck
and auto accessories for the aftermarket parts industries.  Kenco is reported as
a discontinued operation.


Techwood Williams,  Inc.:  Manufactured and distributed commercial wood chippers
used in landscaping  and farming.  Techwood ceased  manufacturing  operations in
fiscal 1997.


Agrotec Williams,  Inc.:  Manufactures  spraying  equipment for the professional
lawn care, nursery and pest control industries.


Hardee Williams,  Inc.: Manufactures equipment used in farming, highway and park
maintenance.


Waccamaw Wheel Williams,  Inc.:  Manufactures solid rubber tail wheels and other
rubber  products,  used on agricultural  equipment,  from recycled truck and bus
tires.


As discussed in note 12 to the Notes to Consolidated  Financial Statements,  the
Company's operations are divided into four industry segments.


Vehicle  Components  - The  Company's  transportation  component  product  lines
include  electronic  throttle  control  systems  ("ETC"),   exhaust  brakes  and
pneumatic and hydraulic controls.  These products are used in applications which
include trucks, utility and off-highway equipment, transit buses and underground
mining  machines.  Markets for the Company's  electronic  throttle  controls are
developing in smaller  classes of trucks and diesel powered pick up trucks.  The
Company  believes  that  gasoline  powered  automobiles  and pick up trucks  may
convert  to ETC,  although  such  conversion  requires  engine  redesign  by the
automotive  manufacturers which is presently ongoing. The Company estimates that
it has over 65%  market  share of ETC for Class 7 & 8 trucks.  The  majority  of
these  products are sold directly to original  equipment  manufacturers  such as
Freightliner,  Navistar,  Volvo,  Izusu,  Motor Coach  Industries  and Blue Bird
Corporation.  The Company also sells these products  through a  well-established
network  of  independent  distributors.  The  major  competitors  in one or more
product lines include Allied Signal, Morris Controls and Furon.


Automotive  Accessories - The automotive  accessories  product lines include bug
and stone deflectors,  running boards,  side steps and bed mats for light trucks
and sport-utility  vehicles.  These products are sold in the aftermarket to mass
merchants  and auto supply stores such as Kmart,  WalMart,  Pep Boys and Western
Auto. The major competitors  include Lund,  Deflecta Shield, GT Styling and Auto
Vent Shade. Automotive accessories is reported as a discontinued operation.


Agricultural Equipment - The agricultural equipment product lines include rotary
cutters,  discs,  harrows and sprayers.  These  products are sold to independent
equipment dealers located primarily in the Southeastern United States. The major
competitors include Wood Brothers, Taylor Industries, Inc. and Alamo Group.


Electrical  Components and GPS - The electrical components product line includes
the  design  and  production  of  microcircuits,   cable  assemblies  and  other
electronic  products  used in  telecommunication,  computer  and  transportation
industries. Major customers include Allied Signal, Raychem and Eaton Corp. Major
competitors include CTS, AMP and Nethode. The GPS product line includes commuter
railroad train tracking and agricultural  cyber-farming using global positioning
and geographic  information systems.  Major customers include Tri-Rail,  Florida
Department of Transportation and Via Tropical Fruit.



Acquisitions and Dispositions


Through  fiscal 1996, the Company  pursued an acquisition  strategy to diversify
its operations. During fiscal 1997, the Company discontinued its diversification
acquisition  strategy in order to focus its corporate and financial resources on
opportunities  emerging in the vehicle components and GPS train tracking markets



                                       3
<PAGE>

and also for the  development  of  commercial  applications  of  sensor  related
products.  The Company may consider  additional  acquisitions in the future that
are strategically related to these opportunities.

On May 8, 1997,  the Company  signed a letter of intent to sell Kenco,  which is
the sole business in the automotive accessories segment.  Accordingly,  Kenco is
reported as a  discontinued  operation.  The letter of intent  expired,  and the
Company  did not renew it;  however,  the Company  intends to  continue  working
towards closing the sale of Kenco with the potential  buyer,  and may enter into
preliminary   discussions  with  possible   alternative   buyers.   The  Company
anticipates  that Kenco will be sold during the second  quarter of fiscal  1998,
but there is no assurance  that the sale will occur.  In the event that the sale
does not occur,  the  Company  will  consider  all  strategic  alternatives  for
reducing  its'  operating  losses,   including  sale,  merger,   liquidation  or
abandonment.  Based upon the current  proposed  terms of the sale, the purchaser
will acquire  certain  assets,  excluding the Kenco finished goods inventory and
manufacturing  and warehousing  facility for $1,000 to $2,000 in cash, issue the
Company certain equity securities in the new company, and assume liabilities for
trade payables and other current  liabilities.  Under the proposed  transaction,
the Company will own and warehouse the Kenco finished  goods  inventory and sell
such inventory to the purchaser during the nine months following the acquisition
on 60-day payment terms.  The purchaser will be obligated to purchase any unsold
inventory at the end of the nine-month period.


Competition


In general,  the Company's  products are sold in highly  competitive  markets to
customers who are sophisticated and demanding concerning price,  performance and
quality. Products are sold in competition with other independent suppliers (some
of which have  substantial  financial  resources and  significant  technological
capabilities),  and many of these  products  are,  or could be,  produced by the
manufacturers  to  which  the  Company  sells  these  products.   The  Company's
competitive position varies among its product lines.


In the vehicle  components  segment the Company is the dominant producer of ETCs
sold in the heavy truck ETC market.  The Company has only one primary competitor
in the diesel heavy truck market.  The Company also  manufactures  pneumatic and
air control  systems for the heavy truck market,  which is comprised of numerous
highly  fragmented  competitors.  The Company  believes the principal  method of
competition for ETC in the trucking  industry is quality and  engineering  added
value  and  reputation.  In  addition,  attainment  of the ISO  9001 and QS 9000
quality certifications is critical to qualifying as a supplier to the automotive
industry and certain  manufacturers  in the truck  industry.  The  Company's two
manufacturing  facilities in its vehicle  components segment have attained these
certifications.  In the automotive  market,  ETC are not yet a well  established
product line;  however,  the Company believes that there are approximately  five
major  competitors  currently  supplying  foot  peddles to the major  automobile
manufactures  and competing for the automotive ETC market.  These  companies are
substantially  larger than the Company and have longstanding  relationships with
their  customers,  which could be a significant  barrier to the Company entering
into this market.


In the agricultural  equipment  segment,  the Company competes primarily against
four competitors,  three of which are substantially larger than the Company. The
principal methods of competition in this segment are price, delivery and payment
terms.  Competitors  in this  industry  currently  provide  seasonal  dating for
payment of  accounts  receivable,  in some  cases up to 180 days for  payment of
invoices.


The primary  revenues from the Company's  electronic  components and GPS segment
are  derived  from sales of thick  film  hybrids.  This  industry  has  numerous
competitors,  which  compete  primarily  on  engineering  capability  and price.
Although  a GPS  product  designed  for  freight  train  tracking  is  currently
available  on the  market,  the  Company  does not  believe  there are any major
competitors for its commuter train tracking product.


Entrance  Into New Markets.  The Company plans to introduce its ETC product into
new markets including international markets,  higher-volume small truck markets,
and gasoline engine automotive  markets.  Although the Company's ETC product has
been successful in the domestic  heavy-duty truck market,  there is no assurance
that this product will be accepted in these new markets.  Additional penetration
of the  Company  sales  into  the  diesel  ETC  market  will be  dependent  upon
conversion of smaller diesel  engines to electronic  engines which is controlled
by the engine  manufacturers in the United States.  Conversion of diesel engines
to ETC  that  are not  yet  electronic  in  Western  Europe  is  dependent  upon
compliance with and tightening of air control standards in this region.




                                       4
<PAGE>

Introduction  of ETC into Gasoline  Engines.  Introduction  of ETC into gasoline
engines will require  modification  or redesign of engine  components  that will
depend upon the timing of development by the automotive  manufacturers and their
original equipment manufacturers.  The Company has no control over the timing of
the introduction of ETC into the automotive or higher-volume truck markets.  The
Company will be competing against much larger  competitors in these markets with
financial  resources  much greater  than those of the Company and with  existing
long term supplier relationships with the automotive industry.


Marketing and Distribution


The Company sells its products to customers in diversified industries worldwide;
however,  approximately  77% of its  sales  from  continuing  operations  are to
customers in the vehicle component segment.

For the years ended  September 30, 1997, 1996 and 1995,  Freightliner  accounted
for 13%,  14% and 17% of net sales  from  continuing  operations,  respectively.
Navistar  and  Volvo  each  accounted  for  11% of  net  sales  from  continuing
operations in fiscal 1997 and fiscal 1996 and 11% and 8%, respectively in fiscal
1995.  Approximately 11%, 15% and 18% of net sales from continuing operations in
fiscal  1997,  1996 and 1995,  respectively,  were to  customers  outside of the
United  States,  primarily  in Canada,  and, to a lesser  extent,  in Europe and
Australia. See note 13 of Notes to Consolidated Financial Statements.


The Company  performs  ongoing credit  evaluations  of its customers'  financial
condition and maintains  allowances for potential  credit losses.  Actual losses
and allowances have been within management's expectations.


Existing Future Sales Orders


Future sales orders for the  Company's  products were  approximately  $11,700 at
September 30, 1997,  compared to $8,900 at September 30, 1996.  These are orders
for which  customers  have  requested  delivery at specified  future dates.  The
Company has not experienced significant problems delivering products on a timely
basis.


Environment


The  Company's  operations  result  in the  production  of small  quantities  of
materials identified by the Environmental Protection Agency of the United States
Government  as  "hazardous  waste  substances"  which  must  be  disposed  of in
accordance  with applicable  local,  state and federal  guidelines.  Substantial
liability  may  result to a company  for  failure,  on the part of itself or its
contractors,  to dispose of hazardous  wastes in accordance with the established
guidelines,  including potential liability for the clean up of sites affected by
improper  disposals.  The  Company  uses its best  efforts  to  ensure  that its
hazardous  substances are disposed of in an environmentally  sound manner and in
accordance with these guidelines.


The Company has  identified  certain  contaminants  in the soil of its Portland,
Oregon  manufacturing  facility,  which the Company believes was disposed on the
property  by  a  previous   property   owner.   The  Company   intends  to  seek
indemnification  from  such  party  for the costs of  permanent  monitoring,  or
cleanup if required.  The Company has retained an environmental  consulting firm
which  is  currently   conducting   tests  to   determine   the  extent  of  any
contamination.  The Company cannot estimate the costs of permanent monitoring or
property cleanup at the present time. However,  the Company believes that it can
enforce  available  claims  against  the prior  property  owner for any costs of
monitoring or cleanup.  The Company  believes it is currently in compliance with
environmental regulations.



                                       5
<PAGE>

Government Regulation


The Company's vehicle  component  products must comply with the National Traffic
and Motor Vehicle Safety Act of 1966, as amended,  and  regulations  promulgated
thereunder  which  are  administered  by the  National  Highway  Traffic  Safety
Administration  ("NHTSA").  If,  after an  investigation,  NHTSA  finds that the
Company is not in compliance  with any of it's standards or  regulations,  among
other things,  it may require the Company to recall its products which are found
not to be in  compliance  and  repair or  replace  such  products.  The  Company
believes it is currently in compliance with NHTSA.



Product Research and Development


The  Company's  operating   facilities  engage  in  engineering,   research  and
development  and  quality  control   activities  to  improve  the   performance,
reliability and cost-effectiveness of the Company's product lines. The Company's
engineering staff works closely with its customers in the design and development
of new products and adapting  products for new  applications.  During 1997, 1996
and 1995,  the Company spent $1,849,  $2,144 and $1,445  respectively,  on these
activities  for  continuing  operations.  The Company  intends to  increase  its
research and development  expenditures in 1998 to design ETC products compatible
with gasoline  powered  vehicles,  develop  commercial  applications for inertia
tilt,  Hall effect,  and optical  sensor  products,  and further  develop  train
tracking  products.  The  Company  is in early  stages of  development  of these
programs  and  expects  to  increase   research  and  development   spending  by
approximately $1 million in fiscal 1999. The majority of the additional  expense
will be spent on  developing a low cost foot pedal,  which is in early stages of
development.



Patents and Trademarks


The  Company's  product  lines  generally  have strong name  recognition  in the
markets which they serve.  The Company has a number of product patents  obtained
over a period of years which expire at various times. The Company considers each
patent to be of value and aggressively  protects its rights against infringement
throughout the world.  The Company owns two patents  (expiring in 2009) which it
believes improved the marketability of the electronic  product line of the heavy
vehicle  components  segment.  The Company  does not  consider  that the loss or
expiration  of either  patent  would  materially  adversely  affect the Company;
however, competition in the electronic product line could increase without these
patents.  The Company owns  numerous  trademarks  which are  registered  in many
countries  enabling  the  Company  to  market  its  products  worldwide.   These
trademarks include "Williams,"  "Kenco" and "Hardee".  The Company believes that
in the  aggregate,  the rights under its patents and  trademarks  are  generally
important to its operations,  but does not consider that any patent or trademark
or group of them  related  to a  specific  process  or  product  is of  material
importance  in relation to the  Company's  total  business  except as  described
above.


   
Raw Materials; Reliance on Single Source Suppliers

The Company produces its products from raw materials, including brass, aluminum,
steel,  plastic,  rubber  and zinc,  which  currently  are widely  available  at
reasonable terms. The Company relies upon, and expects to continue to rely upon,
CTS Corporation, Robertshaw and Caterpillar, Inc. as single source suppliers for
critical  components  and/or  products as these suppliers are currently the only
manufacturers  of sensors made  specifically  for the Company's ETC. The Company
manufactures  a foot  pedal  using a contact  position  sensor  manufactured  by
Caterpillar,  Inc. used exclusively on Caterpillar engines. Caterpillar supplies
this sensor and  requires  that its sensor be used on all  Caterpillar  engines;
therefore,  the Company does not consider the Caterpillar sensor supply to be at
risk.  Although these  suppliers have been able to meet the Company's needs on a
timely  basis,  and appear to be  willing to  continue  being  suppliers  to the
Company, there is no assurance that a disruption in a supplier's business,  such
as a strike,  would not disrupt the supply of a component.  Although the Company
has recently experienced stable prices, prices for aluminum zinc, rubber, steel,
and mechanical  components such as gearboxes,  hydraulics,  and contact position
sensors could fluctuate and affect profitability.
    


Product Warranty


The Company  warrants its products to the first retail  purchaser and subsequent
owners against malfunctions  occurring during the warranty period resulting from
defects in  material  or  workmanship,  subject to  specified  limitations.  The
warranty on vehicle components is limited to a specified time period, mileage or


                                       6
<PAGE>
hours of use, and varies by product and application. The Company has established
a warranty  reserve  based upon its  estimate of the future cost of warranty and
related service costs. The Company  regularly  monitors its warranty reserve for
adequacy in response to historical experience and other factors.


Employees


The Company employs approximately 578 employees,  including 129 union employees.
The  non-union  employees  of the Company  are  engaged in sales and  marketing,
accounting and administration,  product research and development, production and
quality  control.  The union  employees  are  engaged in  manufacturing  vehicle
components  in  the  Portland,  Oregon  facility  and  are  represented  by  the
International  Union, United Automobile Workers of America and Amalgamated Local
492 (the  "Union").  The  Company  and the Union  have a  collective  bargaining
agreement that expires in September 2002,  which provides for wages and benefits
(including pension, death, disability,  health care, unemployment,  vacation and
other  benefits) and contains  provisions  governing  other terms of employment,
such as seniority, grievances, arbitration and union recognition.  Management of
the Company believes that its relationships with its employees and the Union are
good. The Company could experience  changes in non-union labor costs as a result
of changes in local economies and general wage increases.



                                       7
<PAGE>

ITEM 2. PROPERTIES


The following table outlines the principal  manufacturing  and other  facilities
owned by the Company, subject to mortgages on all facilities except Agrotec.


 
Entity                  Facility Location              Type and Size of Facility
------                  -----------------              -------------------------

Kenco                   Middlebury, Indiana            Manufacturing and offices
                                                       139,000 square feet

Hardee                  Loris, South Carolina          Manufacturing and offices
                                                       101,000 square feet

Aptek                   Deerfield Beach, Florida       Manufacturing and offices
                                                       48,000 square feet

Agrotec                 Pendleton, North Carolina      Manufacturing and office
                                                       43,000 square feet



The  Company's  manufacturing  facilities  are equipped  with the  machinery and
equipment  necessary  to  manufacture  and  assemble  its  products.  Management
believes  that the  facilities  have been  maintained  adequately,  and that the
Company  could  increase  its  production  output  significantly  at  any of its
facilities  with minimal  expansion of its present  equipment and work force. In
addition,  the Company  leases a 160,000 square foot  manufacturing  facility in
Portland, Oregon.


The Company's  facilities that are encumbered by mortgages at September 30, 1997
are as follows: Kenco - $1,178,000, Hardee - $775,000 and Aptek - $2,647,000.



ITEM 3. LEGAL PROCEEDINGS


The Company and its  consolidated  subsidiaries  are parties to various  pending
judicial  and  administrative  proceedings  arising  in the  ordinary  course of
business.  The Company's management and legal counsel have reviewed the probable
outcome of these proceedings,  the costs and expenses  reasonably expected to be
incurred,  the availability and limits of the Company's insurance coverage,  and
the Company's established reserves for uninsured liabilities.  While the outcome
of the pending  proceedings  cannot be predicted  with  certainty,  based on its
review,  management  believes  that  any  liabilities  that may  result  are not
reasonably  likely  to  have  a  material  effect  on the  Company's  liquidity,
financial condition or results of operations.



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS


The Company did not submit any matters to a vote of its security  holders during
the fourth quarter of the year ended September 30, 1997.




                                       8
<PAGE>

                                     Part II



ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The  Company's  common  stock is  traded on the  over-the-counter  market of the
National  Association  of  Securities  Dealers  Automated  Quotation  ("NASDAQ")
National Market System under the symbol "WMCO."

The range of high and low bid closing  quotations for the Company's common stock
for each fiscal quarter for the past two fiscal years is as follows:


  
                                                                 1997
                                                                 ----     

                                                         High            Low
                                                         ----            ---


      Quarter
      -------
October 1 - December 31                                $ 2.78           $ 1.97
January 1 - March 31                                     2.84             2.19
April 1 - June 30                                        2.59             1.94
July 1 - September 30                                    2.41             2.13


                                                                 1996
                                                                 ----      
                                                         High            Low
                                                         ----            ---

      Quarter
      -------
October 1 - December 31                                $ 3.41           $ 2.28
January 1 - March 31                                     3.03             2.38
April 1 - June 30                                        2.72             1.72
July 1 - September 30                                    2.75             1.44


The number of record  holders of the  Company's  common stock as of December 31,
1997 was  approximately  570. The Company has never paid a dividend with respect
to its  common  stock  and has no plans  to pay a  dividend  in the  foreseeable
future.





                                       9
<PAGE>


ITEM 6. SELECTED FINACIAL DATA
(Dollars in thousands - except per share amounts)

<TABLE>
<CAPTION>
Statement of Income Data:
<S>                                                    <C>            <C>        <C>          <C>          <C>    

Year ended September 30,                                 1997          1996*      1995**       1994***        1993
------------------------                                 ----          -----      ------       -------        ----

Net sales from continuing operations                   $56,254        $51,279     $44,472      $29,954      $17,100
Earnings from continuing operations                      1,135          2,363       4,971        3,520        1,167
Net earnings (loss)                                    (2,037)          (561)       4,512        3,641        1,167
Earnings from continuing operations per common
share                                                  $   .06        $   .13     $   .29      $   .21      $   .08
Net earnings (loss) per common share                   $ (.11)        $ (.03)     $   .26      $   .22      $   .14
Cash dividends per common share                              -              -           -            -            -

Balance Sheet Data

September 30,                                            1997          1996*      1995**       1994***        1993
-------------                                            ----          -----      ------       -------        ----

Current assets                                         $26,134        $30,926     $25,788      $20,874     $ 10,623
Current liabilities                                     10,006         29,600       7,881       10,012        7,527
Working capital                                         16,128          1,326      17,907       10,862        3,096
Total assets                                            51,376         53,049      47,182       32,159       20,006
Long-term liabilities                                   24,072          4,726      20,244        9,699        5,690
Redeemable convertible preferred stock,
 Including unpaid dividends                                  -              -           -            -          413
Minority interest in consolidated subsidiaries             463            713         764            -            -
Shareholders' equity                                   $16,835        $18,010     $18,293      $12,448       $6,376
</TABLE>


*    1996 data includes small acquisitions from Apri1 1996. Net sales,  earnings
     from  operations  and total assets related to these  acquisitions  were not
     material. See note 16 to the Notes to Consolidated Financial Statements for
     information regarding these acquisitions.

**   1995 data includes acquisitions made in February, April and August. In 1996
     net sales related to these  acquisitions from date of purchase were $9,646;
     earnings from  operations  were $1,039.  Total assets at September 30, 1996
     related to these acquisitions were $16,072.

***  1994 data  includes  small  acquisitions  from  January  1994.  Net  sales,
     earnings from  operations  and total assets  related to these  acquisitions
     were not material. Represents only one full month of operations of Kenco.



                                       10
<PAGE>

ITEM 7. Management's  Discussion and Analysis of Financial Condition and Results
of Operations (Dollars in thousands except per share amounts)

See "Cautionary Statement" contained at the beginning of this report.

Financial  Position and Capital  Resources  
Financial  Condition,  Liquidity and Capital Resources


The Company's  principal  sources of liquidity are  borrowings  under its credit
facilities  and funds  generated  from  operations.  At September 30, 1997,  the
Company's  working capital  improved to $16,128  compared to $1,326 at September
30, 1996 and the current ratio improved to 2.6 at September 30, 1997 compared to
1.0 at September  30, 1996.  The  improvement  was  primarily  the result of the
refinancing of the Company's bank debt and resulting  classification of the loan
as a long term obligation and also as a result of a sale/leaseback  transaction.
The Company  generated  cash flow from  continuing  operations of $2,117 for the
year ended  September 30, 1997  compared to $415 for the prior fiscal year.  The
Company's  1997 cash flow from  continuing  operations  benefited  from improved
receivable  and  inventory  management  and a  federal  tax  refund of $670. The
improved  receivable  management resulted from additional efforts to monitor and
collect past due  accounts  receivable,  including  sending  demand  letters and
hiring outside collection services. In addition,  in the agricultural  equipment
segment,  the Company has begun  monitoring  dealer  inventories  to ensure that
receivables  are paid no later than when the  equipment is sold. 

The Company generated cash flow from  discontinued  operations of $1,577 for the
year ended September 30, 1997, compared to cash used in discontinued  operations
of $3,660 for the prior  fiscal  year.  Cash flow from  discontinued  operations
improved because of lower accounts receivable and inventory resulting from lower
sales levels.  At September 30, 1997  accounts  receivable  decreased to $8,468,
compared to $13,103 at September 30, 1996 primarily due to the  reclassification
of accounts receivable as net assets held for disposition and to decreased sales
at the discontinued  automotive accessories segment. In addition,  during fiscal
1997, the Company  implemented an inventory  reduction program in this operation
which reduced inventories approximately $1 million.
 
The Company  anticipates that cash generated from operations and borrowings will
be sufficient to satisfy  working capital and capital  expenditure  requirements
for current  operations fOr the next twelve months, but the Company will require
additional financing to fund approximately $1 million of additional research and
development  projects,  an additional  investment of approximately $2 million in
Ajay and new equipment  purchases of  approximately $3 million for and moving of
the PPT facility.  The Company intends to raise  additional  capital through the
sale of Kenco,  a possible  sale/leaseback  of a  manufacturing  facility  and a
private  placement or public  offering of common or preferred stock in the third
or fourth quarter of fiscal 1998. The proceeds of the sale of Kenco are expected
to be approximately  $1,000 to $2,000 plus the assumption of certain liabilities
and a retained equity investment in the acquiring company. In addition, the sale
of Kenco  inventory  during the six months  following  the sale are  expected to
generate an additional  $3,000 to $4,000 of cash.  The proceeds from the sale of
Kenco, if completed,  will be used to repay bank debt of  approximately  $1,800.
Any excess  proceeds  will be used  towards  payment of the $2,340  bridge  loan
provided to Ajay by the  previous  lender.  The Company is in  discussions  with
investment bankers about a possible institutional private placement of equity or
equity linked securities and is in discussion with real estate investment trusts
about the  possible  sale/leaseback  of the  Aptek  manufacturing  and  research
facility in Deerfield Beach, Florida. There is no assurance that the Company can
raise new capital on terms acceptable to the Company or sell the Aptek facility.

During the three fiscal years ended September 30, 1997, the Company's automotive
accessories  division reported a net loss from operations of approximately  $6.6
million.  Excluding the automotive  accessory  segment,  the Company  reported a
cumulative profit from continuing operations during that period of $8.5 million.
If the Company is  successful  in selling this  division,  the Company would not
incur  future  operating  losses  and  uses of cash  from  this  operation.  The
Company's  plans to invest  additional  capital  in Ajay is  dependent  upon the
Company raising  additional  capital.  If the Company is unsuccessful in raising
additional capital,  the investment in Ajay would come from the Company's excess
cash flow and would likely be delayed  until the Company had adequate  liquidity
for such investment.



                                       11
<PAGE>
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations (Dollars in thousands except per share amounts)

In April 1997 the Company sold its Portland,  Oregon manufacturing facility in a
sale-leaseback transaction for $4,524. The Company may be required to repurchase
the property in April 1998 if it cannot cure possible  environmental problems at
the sold property and may be required to finance $3,200 of the purchaser's price
if the  purchaser  cannot  obtain  permanent  financing  from a lender who would
accept the environmental  condition of the property.  The purchaser informed the
Company  that it has entered  into a purchase  and sale  agreement  with a third
party  who  will  purchase  the  property  without  any  contingent   repurchase
obligation subject to the third party's due diligence. The Company has the right
of first  refusal  to  repurchase  the  building  during  the first  year if the
purchaser  attempts  to sell the  property  to a third  party.  The  acquisition
agreement  with the  company  which  owned  the  building  prior to the  Company
contains  provision  for  indemnification  by the  seller  of any  environmental
cleanup costs after the subsidiary spends $25 towards such cleanup.  The Company
intends to seek  indemnification  from the prior  property  owner for  permanent
monitoring or cleanup costs, if any.

On July 11, 1997,  the Company and Ajay  refinanced  their bank debt with a bank
under  a  $34,088   three-year   revolving   credit  and  term  loan  agreement.
Accordingly,  the Company has reported bank debt as a long-term  liability as of
September  30, 1997.  At the date of the Loan  closing,  the Company  borrowed a
total of $17,141 which was  comprised of $9,619 of borrowings  under the $26,000
revolving loan facility (the  "Revolver"),  $2,658 under a real estate term loan
("Real Estate  Loan"),  $3,864 under a machinery and equipment  loan ("Term Loan
I"), and $1,000 under a term loan ("Term Loan II"). The Company had $488 of loan
availability under the revolving loan as of September 30, 1997.

The Company had guaranteed the debt of Ajay to the previous lender. The previous
lender  provided Ajay $2,340 of bridge  financing and the Company  provided Ajay
$2,268 at Loan closing to repay the previous loan in full. The expected  sources
of repayment for the bridge loan are primarily  derived from expected  financial
transactions  of the  Company.  Therefore,  it is likely  that Ajay will need to
borrow  additional funds from the Company in the future to repay the bridge loan
to the extent  that the bridge loan is repaid with  Company  funds.  These loans
were necessary because the Company was prohibited from  down-streaming  funds to
Ajay while the  previous  loan was in  default.  The  Company has also agreed to
purchase  approximately  $1,000 of notes payable by Ajay to  affiliated  parties
which had  provided  loans to Ajay to help Ajay  finance  operations  during the
financial restructuring; such notes payable have not yet been purchased.

The Company and Ajay have agreed to a plan (the "Ajay Recapitalization") whereby
Ajay plans to obtain permanent bank financing  independent of the Company's loan
which,  management of Ajay has informed the Company,  when combined with a final
investment  by the  Company,  would  result  in  adequate  working  capital  and
eliminate any  requirements for further advances or guarantees from the Company.
Ajay  management  informed  the  Company it has signed a proposal  letter with a
lender for an asset based loan, which Ajay management  informed the Company that
it  believes  that based on  expected  loan  advance  rates  would  result in an
approximately  $2,000  shortfall of its projected  working  capital  needs.  The
Company intends to invest up to $2,000 to provide Ajay adequate working capital,
of which approximately  $1,000 would be required no later than February 1998. If
Ajay successfully completes its bank financing, the Company has also proposed to
exchange up to $4,000 of loans and advances into  convertible  voting  preferred
stock which Ajay  management  has informed  the Company  that it believes  would
allow Ajay to meet the minimum net worth  criteria for continued  listing on the
NASDAQ.  The  preferred  stock  would  pay a  dividend  rate of 9% and  would be
convertible  into up to  12,000,000  shares of Ajay common  stock.  As presently
proposed,  the dividend rate would  increase two  percentage  points each in the
year 2002 and 2003 if Ajay does not achieve pre-tax earnings of at least $500 in
the two consecutive years prior to 2002 and 2003.

In addition to the  financing  needs for the  investment  in Ajay and the moving
costs and new  equipment  purchases  for PPT, the Company  intends to accelerate
funding of certain  research  and  development  projects by  establishing  a new
product  development  center in its Deerfield  Beach,  Florida  facility.  These
projects  will  include  development  of new ETC  products  for advance  vehicle
platforms,  development  of new  electronic  sensors  and  controls  for vehicle
applications, development of industrial applications for certain existing sensor
products and development of GPS based train tracking systems.



Year 2000 Conversion.  The Company  recognizes the need to ensure its operations
will not be adversely impacted by Year 2000 software failures. Software failures
due to processing errors  potentially  arising from calculations  using the Year
2000  date  are a  known  risk.  The  Company  is  addressing  this  risk to the


                                       12
<PAGE>
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations (Dollars in thousands except per share amounts)

availability  and  integrity of  financial  systems and the  reliability  of the
operational  systems.  The Company has established  processes for evaluating and
managing  the  risks  and  cost   associated   with  this   problem,   including
communicating with suppliers,  dealers and others with which it does business to
coordinate Year 2000 conversion.  The total cost of compliance and its effect on
the Company's  future  results of operations is being  determined as part of the
detailed conversion planning process.

Recent FASB Pronouncements - The Financial  Accounting  Standards Board ("FASB")
recently  issued SFAS No. 128,  "Earnings  Per Share",  which is  effective  for
fiscal years  ending  after  December  15,  1997.  This  statement  replaces the
presentation of primary  earnings per share ("EPS") with a presentation of basic
EPS. It also requires dual  presentation of basic and diluted EPS on the face of
the income  statement  for all entities  with  complex  capital  structures  and
requires  reconciliation  of the  numerator  and  denominator  of the  basic EPS
computations  to the numerator and  denominator of the diluted EPS  computation.
Basic EPS excludes  dilution.  Diluted EPS reflects the potential  dilution that
could  occur  if  securities  or other  contracts  to issue  common  stock  were
exercised or  converted  into common stock or resulted in the issuance of common
stock that then  shared the  earnings  of the  entity.  Diluted  EPS is computed
similar to fully diluted EPS. SFAS No. 128 requires  restatement of all EPS data
that was  presented  in  previously  filed  reports.  Management  believes  that
implementation  of SFAS No. 128 will not have a material  effect on earnings per
share.

The FASB also recently issued SFAS No.'s 130 and 131,  "Reporting  Comprehensive
Income"  and   "Disclosures   about   Segments  of  an  Enterprise  and  Related
Information,"  respectively.  Both of these  statements are effective for fiscal
years beginning  after December 15, 1997. SFAS No. 130 establishes  requirements
for disclosure of  comprehensive  income which includes certain items previously
not included in the  statement of income  including  minimum  pension  liability
adjustments  and  foreign  currency  translation   adjustments,   among  others.
Reclassification  of earlier  financial  statements for comparative  purposes is
required.  SFAS No. 131 revises  existing  standards for  reporting  information
about operating  segments and requires the reporting of selected  information in
interim financial reports.  SFAS No. 131 also establishes  standards for related
disclosures about products and services,  geographic areas, and major customers.
Management  believes  that  implementation  of SFAS No. 130 and No. 131 will not
materially affect the Company's financial statements.




                                       13
<PAGE>
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations (Dollars in thousands except per share amounts)

Results of Operations

Year ended September 30, 1997 Compared to September 30, 1996

Overview

Net sales from  continuing  operations  increased  10% to $56,254 in fiscal 1997
from  $51,279 in fiscal 1996 due to higher unit sales  volumes in the  Company's
vehicle  component  segment,  which was partially offset by declining unit sales
volumes  in  the  agricultural  equipment  and  electrical  components  and  GPS
segments.

Earnings from continuing  operations decreased 24% to $4,272 in fiscal 1997 from
$5,594 in fiscal 1996 due to  increases in unit sales  volumes in the  Company's
vehicle component  segment,  which was offset by declining unit sales volumes in
the agricultural equipment and electrical components and GPS segments.

Net losses increased to $2,037 in fiscal 1997 from $561 in the prior fiscal year
due to increased  losses in the Company's  discontinued  automotive  accessories
segment  and  higher  losses  in  the  agricultural   equipment  and  electrical
components and GPS segments.  Net losses in these segments were partially offset
by increased profitability in the vehicle components segment.

Net Sales

Net sales from continuing operations in the vehicle components segment increased
19% to $43,078 in fiscal 1997 over levels  achieved in fiscal 1996 due to higher
ETC unit sales  volumes  in the Class 7 and 8 truck OEM  markets  and  increased
sales of plastic parts and prototyping in the automotive manufacturing industry.
Sales  increases  in the vehicle  component  segment  were  partially  offset by
decreases in sales of 15% and 9% in the  Company's  agricultural  equipment  and
electrical component and GPS segments, respectively. Significant sales increases
of GPS systems were offset by declines of electrical components in that segment.
Sales declines in the  agricultural  equipment and electrical  component and GPS
segments  are  attributed  to  lower  unit  volumes  associated  with  increased
competition.

Gross margin

Gross margin from  continuing  operations  decreased 6%, to $12,890  compared to
$13,673  in fiscal  1996.  Gross  margins  increased  10% in fiscal  1997 in the
vehicle components  segment due to higher unit sales volumes.  Increases in this
segment were offset by decreases of 92% in the Company's  agricultural equipment
segment and 17% in the electrical  component and GPS segments.  Decreased  gross
margins in these segments are attributed to lower unit sales volumes.

Operating expenses

Operating  expenses for  continuing  operations  increased 7% during fiscal 1997
compared to amounts in fiscal 1996.  Operating  expenses as a percentage  of net
sales  from  continuing  operations  decreased  slightly  in fiscal  1997 to 15%
compared to 16% in fiscal 1996.  Operating  expenses increased 3% in fiscal 1997
in the vehicle component segment to $4,326 and 26% in the electronic  components
and GPS  segment  compared  to 1996  levels,  while  operating  expenses  in the
agricultural   equipment  segment  remained  relatively  stable.   Increases  in
operating  expenses were attributed to higher sales volumes of the Company's ETC
and GPS products.

Research and  development  expenses for continuing  operations  decreased 14% to
$1,849 during fiscal 1997 compared to amounts in fiscal 1996. As a percentage of
net  sales  from  continuing  operations,   research  and  development  expenses
decreased from 4% to 3%.  Decreases in dollar amount were due to curtailments of
research  and  development  activities  in  all  business  segments  during  the
Company's bank refinancing negotiations in fiscal 1997.

Selling  expenses for  continuing  operations  increased 20% to $2,913 in fiscal
1997 compared to 1996 levels. Selling expenses as a percentage of net sales from
continuing  operations  remained  stable at 5% in fiscal 1997 and 1996.  Selling



                                       14
<PAGE>

Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations (Dollars in thousands except per share amounts)

expenses  increased  due to increased  sales  volumes in the vehicle  components
segment  and  additional  sales  and  marketing  activities  in  the  electrical
components and GPS and agricultural equipment segments.

General and administrative  expenses for continuing  operations increased 10% in
fiscal  1997  to  $3,856   compared  to  fiscal   1996   amounts.   General  and
administrative  expenses  remained  stable  at 7% of net sales  from  continuing
operations in fiscal 1997 and 1996. Increases in dollar amount at the electrical
components and GPS and vehicle component segments in fiscal 1997 were attributed
to additional management personnel required for future growth activities.

Earnings from continuing operations

Earnings from continuing  operations decreased 24% to $4,272 in fiscal 1997 from
$5,594 in fiscal  1996 due to  increased  operating  losses in the  agricultural
equipment and electrical components and GPS business segments.

Other Expenses

Other  expenses  increased  25% to $2,232 in fiscal  1997 from  $1,782 in fiscal
1996.  Increases were attributed to increased interest rates associated with the
Company's  borrowing  activities and new loan  agreements  and increased  equity
interest losses in affiliate (AJAY Sports, Inc.).

Discontinued operations

Net losses from the discontinued  automotive accessories segment were $3,172 net
of tax  benefits  of $2,121  for  fiscal  1997,  compared  to $2,924  net of tax
benefits of $1,885 in fiscal 1996. The fiscal 1997 net loss includes  operations
through  the  measurement  date of May 8, 1997.  All losses  incurred  after the
measurement date are reported as losses on disposal of discontinued  operations.
The 1996 losses include a pre-tax operating restructuring charge of $2,250.

Net sales from the discontinued  segment declined $7,375, or 47%, in fiscal 1997
to $8,666 from $16,043 in fiscal 1996. The decline in automotive accessory sales
were due to lower unit sales and lower  prices  resulting  from strong  downward
prices pressure generated by competitors who are more vertically  integrated and
have lower cost structures than the Company's automotive accessories segment.

The estimated  loss on disposal of the business of $1,965  consists of $1,171 of
estimated  future  operating  losses  net of tax  benefits  of $781  and $794 of
operating  losses  incurred  since the  measurement  date net of tax benefits of
$530. The $794 of operating  losses since the measurement  date includes $489 of
charges that are primarily for  inventory  reserves.  The Company has elected to
include interest costs in its estimated loss on disposal based upon the expected
debt  reduction  from  the  $5,000  of cash  proceeds  and the  current  rate of
interest.



                                       15
<PAGE>
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations (Dollars in thousands except per share amounts)

Results of Operations
                    
Year ended September 30, 1996 Compared to September 30, 1995

Sales

Sales for the year ended September 30, 1996 increased 15% to $51,279 compared to
$44,472 for the prior year. Sales of vehicle components, agricultural equipment,
and  electrical  components  accounted for 70%, 22% and 8% as a percent of total
sales for the year ended  September 30, 1996 compared to 78%, 15% and 7% for the
prior year.  Vehicle  component  sales were $36,141 for the year ended September
30, 1996 compared to $34,826 for the prior year, an increase of 4%. Agricultural
equipment  sales were $11,026 for the year ended  September 30, 1996 compared to
$6,783 for the prior year, an increase of 63%.  Sales of  electrical  components
were $4,112 for the year ended  September  30,  1996  compared to $2,863 for the
prior year, an increase of 44%. Agricultural  equipment and electrical component
sales were the result of acquisitions completed in February 1995 and April 1995.

Vehicle  component  sales were  relatively  flat for the year as retail sales of
Class 8 trucks, the primary market for the Company's electronic throttle product
line,  declined over 20% compared to the prior year.  Historically,  the Class 8
truck market has been cyclical with annual production ranging from approximately
100,000 to 200,000 units.  In calendar year 1995,  Class 8 truck  production was
over 200,000 units, which capped five years of increased annual  production.  In
calendar 1996, Class 8 truck production  declined to an estimated 160,000 units.
The decrease in the Class 8 truck market has been offset by an increase in sales
to the midrange truck market,  which continues to introduce electronic throttles
to new truck models,  as this technology  becomes more acceptable to this market
segment.  The Company anticipates this trend to continue for approximately 12 to
18 months.

Agricultural  equipment  and  electrical  component  sales  are the  results  of
acquisitions  in  1995  and,  therefore,  comparison  of  1996  to  1995  is not
meaningful.   The  agricultural   equipment   segment  has  increased  sales  by
integrating  small product line  acquisitions  into its primary dealer  network.
Sales in the electrical  component segment were lower than expected for the year
due to loss of two primary customers.


Earnings from Operations

Earnings  from  operations  for the year ended  September  30,  1996 were $5,594
compared  to  $9,498  for the prior  year,  a  decrease  of 41%.  Earnings  from
continuing  operations as a percentage of sales for the year ended September 30,
1996 were 11% compared to 21% for the prior year.  The decrease in earnings from
continuing  operations  is due to lower gross  margins and  increased  operating
expenses.

Gross margin as a percentage of sales for the year ended  September 30, 1996 was
27% compared to 33% for the prior year.  The  decrease in gross  margin  results
from a larger percentage of the Company's  operations being in business segments
with  lower  gross  margins  primarily  as a  result  of  acquisitions.  Margins
decreased in the agricultural  equipment  segment due to increased cost incurred
to improve product quality and because of an  unprofitable  product line,  which
was discontinued in fiscal 1996.  Gross margins  decreased 29% in fiscal 1996 in
the  Company's   vehicle  component  segment  due  to  higher  fixed  costs  and
acquisitions of lower  performing  businesses.  Gross margins remained stable in
the Company's  agricultural equipment and electronic component and GPS segments.
Increases in sales in these two segments were offset by higher costs.


Operating  expenses for the year ended  September 30, 1996 were $8,079 or 16% of
sales compared to $5,178 or 12 % of sales for the same period in the prior year.
The  increased  operating  expenses are due primarily to costs  associated  with
companies  acquired in the  agricultural  equipment  and  electrical  components
segments.


                                       16
<PAGE>
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations (Dollars in thousands except per share amounts)


Research and  development  expenses for continuing  operations  increased 48% to
$2,144 during fiscal 1996 compared to amounts in fiscal 1995. As a percentage of
net  sales  from  continuing  operations,   research  and  development  expenses
increased  from 3% to 4%.  Increases  in dollar  amount  were  primarily  due to
additional  activities  related to product  development in the Company's vehicle
component segment.

Selling  expenses for  continuing  operations  increased 75% to $2,421 in fiscal
1996 compared to 1995 levels. Selling expenses as a percentage of net sales from
continuing  operations  increased  to 5% in fiscal 1996 from 3% in fiscal  1995.
Selling  expenses  increased  primarily  due to increased  sales  volumes in the
agricultural equipment and electronic components and GPS segments and additional
sales  and  marketing  activities  in the  electrical  components  and  GPS  and
agricultural equipment segments.

General and administrative  expenses for continuing  operations increased 50% in
fiscal  1996  to  $3,514   compared  to  fiscal   1995   amounts.   General  and
administrative  expenses as a percentage of net sales from continuing operations
increased  to 7% in  fiscal  1996 from 5% in fiscal  1995.  Increases  in dollar
amount  were  attributed  primarily  to higher  sales  levels  in the  Company's
agricultural  equipment  segment  and  electrical  components  and GPS  segment.
General and  administrative  expenses also  increased due to the  acquisition of
businesses  within  the  vehicle  component  and  electrical  component  and GPS
segments.

Earnings from operations of the vehicle  component segment decreased 19% for the
year ended  September  30,  1996  compared to the prior  year.  The  decrease in
earnings  from  operations in this segment is due to the shift in product mix to
products used in midrange truck applications, which typically have lower margins
than  heavy-duty  truck  applications.  In addition,  due to the downturn in the
Class 8 truck market segment,  the Company's  customers are faced with increased
price  pressure to compete in this cyclical  market.  Therefore,  the Company is
working with its customers to maintain or reduce selling prices while  absorbing
the increased cost of raw materials.

The discontinued  automotive  accessories  segment had losses from operations of
$2,924 for the year ended  September 30, 1996 compared to losses from operations
of $459 for the prior year.  The primary reason for the increased loss is due to
a one-time restructuring charge of $2,250 recognized during the third quarter.

The electrical components and GPS segment had losses from operations of $659 for
the year ended  September 30, 1996 compared to earnings from  operations of $182
for the prior year.  The loss from  operations  was due primarily to the loss of
two of its major customers in the telecommunication industry. The electrical and
GPS components  segment was added through an  acquisition  completed in April of
1995.  The  electrical   components   segment  continues  to  focus  on  product
development efforts to enhance future sales opportunities.

The  agricultural  equipment  segment had losses from operations of $578 for the
year ended  September 30, 1996 compared to earnings from  operations of $857 for
the prior year. The agricultural equipment segment resulted from acquisitions in
February 1995. The  agricultural  equipment  segment had increased  overhead and
production   inefficiencies   and  an  unprofitable   product  line,  which  was
discontinued  in August 1996. It also had increased costs to improve its product
line to meet the quality of competition.

Other Expenses


Interest expense included in continuing  operations for the year ended September
30, 1996 was $1,607  compared to $1,674 for the year ended September 30, 1995 as
a result of  increased  borrowings  plus a loss from the equity  interest  in an
affiliate of $175,000.  Interest expense included in discontinued operations for
the year ended September 30, 1996 and 1995 was $456. Interest income,  affiliate
relates to a loan provided to Ajay, which was repaid in July of 1995.




                                       17
<PAGE>
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations (Dollars in thousands except per share amounts)

Net Earnings (Loss)

The net loss for the year ended  September  30,  1996 was $561 or $.03 per share
compared to net earnings of $4,512 or $.26 per share for the prior year.



                                       18
<PAGE>


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



                             WILLIAMS CONTROLS, INC.
                   Index to Consolidated Financial Statements



                                                                           Page

Consolidated Balance Sheet at September 30, 1997 and 1996                   20

Consolidated Statement of Shareholders' Equity for the 
years ended September 30, 1997, 1996 and 1995                               21

Consolidated  Statement of  Operations  for the years 
ended September 30, 1997, 1996 and 1995                                     22

Consolidated Statement of Cash Flows for the years
ended September 30, 1997, 1996 and 1995                                     23

Notes to Consolidated Financial Statements                               24-47

Independent Auditors' Report                                                48

See page 51 for Index to Schedules and page 54 for Index to Exhibits.


                                       19
<PAGE>


                             Williams Controls Inc.
                           Consolidated Balance Sheet
         (Dollars in thousands, except share and per share information)
<TABLE>
<CAPTION>
<S>                                                                 <C>                     <C>

                                                                        September 30,         September 30,
                                                                            1997                   1996
                                                                     --------------------    --------------------
ASSETS
Current Assets:
  Cash and cash equivalents                                               $       700          $       1,379
  Trade and other accounts receivable, less allowance of $185 and
   $1,250 in 1997 and 1996, respectively                                        8,468                 13,103
  Inventories                                                                  14,517                 15,288
  Prepaid expenses and other                                                    1,811                  1,156
  Net assets held for disposition                                                 638                      -
                                                                     --------------------    --------------------
   Total current assets                                                        26,134                 30,926

Investment in affiliate                                                           559                    943
Property plant and equipment, net                                              18,080                 19,801
Receivables from affiliate                                                      3,645                      -
Net assets held for disposition                                                 1,610                      -
Other assets                                                                    1,348                  1,379
                                                                     ====================    ====================
   Total assets                                                          $     51,376          $      53,049
                                                                     ====================    ====================

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:
  Accounts payable                                                      $      5,070            $      5,895
  Accrued expenses                                                             3,008                   2,493
  Current portion of long-term debt and capital leases                         1,428                     212
  Estimated loss on disposal                                                     500                       -
  Revolving line of credit                                                         -                  21,000
                                                                     --------------------     -------------------
   Total current liabilities                                                  10,006                  29,600

Long-term debt and capital lease obligations                                  22,857                   2,782
Other liabilities                                                              1,215                   1,944

Commitments and contingencies                                                      -                       -

Minority interest in consolidated subsidiaries                                   463                     713

Shareholders' equity:
  Preferred stock ($.01 par value, 50,000,000 authorized)                          -                       -
  Common stock ($.01 par value, 50,000,000 authorized;
   17,912,240 and 17,869,987 issued at September 30,
   1997 and 1996, respectively)                                                  179                     179
  Additional paid-in capital                                                   9,822                   9,671
  Retained earnings                                                            7,402                   9,439
  Unearned ESOP shares                                                         (191)                   (511)
  Treasury stock (130,200 and 195,200 shares at
   September 30, 1997 and 1996, respectively)                                  (377)                   (540)
  Pension liability adjustment                                                     -                   (228)
                                                                     --------------------     -------------------
   Total shareholders' equity                                                 16,835                  18,010
                                                                     ====================     ===================
   Total liabilities and shareholders' equity                           $     51,376           $      53,049
                                                                     ====================     ===================

</TABLE>

        The accompanying notes are an integral part of these statements.

                                       20
<PAGE>



                             Williams Controls, Inc.
                 Consolidated Statement of Shareholders' Equity
                             (Dollars in thousands)

<TABLE>
<CAPTION>
<S>                               <C>           <C>       <C>           <C>       <C>          <C>         <C>        <C>

                                          Issued                                                   
                                       Common stock                                              Pension
                                   ---------------------   Additional   Retained     Unearned   Liability   Treasury   Shareholders'
                                     Shares     Amount      Paid in     Earnings   ESOP Shares  Adjustment   Shares       Equity
                                                            Capital
                                   ----------- ---------  ------------  --------   -----------  ----------  --------   -------------
 


Balance, September 30, 1994        16,676,181   $   167    $    7,066    $ 5,488     $     -     $   (273)   $    -      $  12,448
                                                   

Net earnings                                -         -             -      4,512           -            -         -          4,512 
Common stock issued pursuant to
   acquisitions                       588,806         6         1,957          -           -            -         -          1,963
                                      
Unearned ESOP shares                        -         -             -          -        (630)           -         -           (630)
                                   ----------- ---------  ------------  --------   -----------  ----------  --------  --------------

Balance, September 30, 1995        17,264,987       173         9,023     10,000        (630)        (273)        -         18,293
                                                                  

Net loss                                    -         -             -       (561)          -            -         -           (561)

Issuance of shares upon exercise
   of stock options and warrants      455,000         4           231          -           -            -         -            235
Common stock issued pursuant to
   acquisitions                       150,000         2           288          -           -            -         -            290
Reduction of unallocated ESOP               
   shares                                   -         -           129          -         119            -         -            248
Change in pension liability                 
   adjustment                               -         -             -          -           -           45         -             45
Cost of treasury shares acquired            -         -             -          -           -            -      (540)          (540)
                                   ----------- ---------  ------------  --------   -----------  ----------  --------  --------------

Balance, September 30, 1996        17,869,987       179         9,671      9,439        (511)        (228)     (540)         18,010
                                   


Net loss                                    -         -             -    (2,037)           -            -         -          (2,037)
Issuance of contingent shares
   for acquisition                     42,253         -           106                                                           106
Treasury stock issued for
   acquisition Services                     -         -             -          -           -            -       163             163
Reduction of unallocated ESOP   
   shares                                   -         -            45                    320                                    365 
Change in pension liability                 
   adjustment                               -         -             -          -           -          228         -             228
                                   ----------- ---------  ------------  --------   -----------  ----------  --------  --------------
Balance, September 30, 1997        17,912,240   $   179    $    9,822    $ 7,402     $  (191)    $      -    $ (377)     $   16,835
                                                                                                          
                                   =========== =========  ============  ========   ===========  ==========  ========  ==============
</TABLE>




        The accompanying notes are an integral part of these statements.

                                       21
<PAGE>


                             Williams Controls, Inc.
                      Consolidated Statement of Operations
         (Dollars in thousands, except share and per share information)

<TABLE>
<CAPTION>
<S>                                                                    <C>                 <C>              <C>    

                                                                                 For the year ended September 30
                                                                            1997               1996              1995
                                                                        --------------     --------------    -------------

Sales                                                                     $    56,254        $    51,279       $   44,472
Cost of sales                                                                  43,364             37,606           29,796
                                                                        --------------     --------------    -------------
Gross margin                                                                   12,890             13,673           14,676

Operating expenses:
 Research and development                                                       1,849              2,144            1,445
 Selling                                                                        2,913              2,421            1,384
 Administration                                                                 3,856              3,514            2,349
                                                                        --------------     --------------    -------------
  Total operating expenses                                                      8,618              8,079            5,178
                                                                        --------------     --------------    -------------
                                                                                            
Earnings from continuing operations                                             4,272              5,594            9,498
Other (income) expenses:
  Interest expense                                                              1,848              1,607            1,674
  Interest income, affiliate                                                        -                  -            (601)
  Equity interest in loss of affiliate                                            384                175              282
                                                                        --------------     --------------    -------------
   Total other expenses                                                         2,232              1,782            1,355
                                                                        --------------     --------------    -------------


Earnings from continuing operations before income tax expense                   2,040              3,812            8,143
Income tax expense                                                              1,155              1,505            3,108
                                                                        --------------     --------------    -------------
Earnings from continuing operations before minority interest                      885              2,307            5,035
Minority interest in net (earnings) loss of consolidated subsidiaries             250                                (64)
                                                                                                      56
                                                                        --------------     --------------    -------------

Earnings from continuing operations                                             1,135              2,363            4,971

Discontinued operations:                                                                    
  Loss from operations of automotive accessories segment                      (1,207)            (2,924)            (459)
  Loss on disposal of automotive accessories segment, including                                 
                                                                                            
   Provision of $1,171 for operating losses during phase-out period           (1,965)                  -                -
                                                                        --------------     --------------    -------------
  Loss from discontinued operations                                           (3,172)                               (459)
                                                                                                 (2,924)
                                                                        --------------     --------------    -------------


Net earnings (loss)                                                       $   (2,037)         $    (561)       $   4,512
                                                                        ==============     ==============    =============


Earnings per common share from continuing operations                      $     0.06          $    0.13        $    0.29
Loss per common share from discontinued operations                             (0.17)             (0.16)           (0.03)
                                                                        --------------     --------------    -------------
Net earnings (loss) per common share                                      $    (0.11)         $   (0.03)       $    0.26
                                                                        ==============     ==============    =============

Weighted average shares used in per share calculation                      18,200,000         17,800,000       17,600,000
                                                                        ==============     ==============    =============
</TABLE>

        The accompanying notes are an integral part of these statements.

                                       22
<PAGE>

                             Williams Controls, Inc.
                      Consolidated Statement of Cash Flows
                             (Dollars in thousands)

<TABLE>
<CAPTION>
<S>                                                                    <C>                   <C>                 <C>    


                                                                                   For the year ended September 30,
                                                                              1997                 1996               1995
                                                                        ------------------    ---------------     --------------
Cash flows from operating activities:
 Net income (loss)                                                          $     (2,037)       $      (561)        $     4,512
Adjustments   to  reconcile   net  income  (loss)  to  net  cash  from
continuing operations:
 Loss from discontinued operations                                                  3,172              2,924                459
 Depreciation and amortization                                                      1,375              1,899              1,382
 Minority interest in earnings (loss) in consolidated subsidiaries                  (250)               (56)                 64
 Equity interest in loss of affiliate                                                 384                175                282
 Deferred income taxes                                                            (1,368)              (491)                167
Changes in working capital of continuing operations, net of
acquisitions:
 Receivables                                                                        (108)                349              (846)
 Inventories                                                                          771            (2,401)            (1,068)
 Accounts payable and accrued expenses                                                258              (310)              (449)
 Other                                                                               (80)            (1,113)                253
                                                                        ------------------    ---------------     --------------
 Net cash provided by operating activities of continuing operations                 2,117                415              4,756

Cash flows from investing activities:
 Repayments from (loans to) an affiliate                                          (3,645)                  -              4,913
 Payments for acquisitions                                                              -            (1,220)            (6,766)
 Payments for property, plant and equipment                                         (811)            (1,237)            (1,147)
                                                                        ------------------    ---------------     --------------
Net cash used for investing activities of continuing operations                   (4,456)            (2,457)            (3,000)

Cash flows from financing activities:
 Proceeds from long-term debt and capital lease obligations                        16,809              6,000             15,000
 Repayments of long-term debt and capital lease obligations                      (21,000)              (267)            (8,564)
 Proceeds from sale/leaseback transaction                                           4,274                  -                  -
 Proceeds from issuance of common stock                                                 -                235                  -
 Repurchase of common stock                                                             -              (540)                  -
 Net repayments under lines of credit                                                   -                  -            (3,187)
 Payment of debt issuance costs                                                         -                  -              (364)
                                                                        ------------------    ---------------     --------------
Net cash provided by financing activities of continuing operations                     83              5,428              2,885

Net cash provided by (used in) discontinued operations                              1,577            (3,660)            (3,230)

Net increase (decrease) in cash and cash equivalents                                (679)              (274)              1,411

Cash and cash equivalents at beginning of period                                    1,379              1,653                242

                                                                        ==================    ===============     ==============
 Cash and cash equivalents at end of period                                    $      700         $    1,379          $   1,653
                                                                        ==================    ===============     ==============

Supplemental disclosure of cash flow information:
                                                                        ==================    ===============     ==============
 Interest paid                                                                $     2,275         $    1,800          $   2,400
 Income taxes paid, net of refund                                             $     (424)         $    1,200          $   2,600
                                                                        ==================    ===============     ==============
</TABLE>



The non-cash activity related to the Company's  investing  activity is described
in note 4, and  non-cash  activity  related  to the  Company's  acquisitions  is
described in note 16.

        The accompanying notes are an integral part of these statements.


                                       23
<PAGE>

Notes to Consolidated Financial Statements

Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)


Note 1. Summary of Operations

Williams  Controls,  Inc,  including  its  wholly-owned  subsidiaries,  Williams
Controls Industries, Inc. ("Williams");  Aptek Williams, Inc. ("Aptek"); Premier
Plastic Technologies,  Inc. ("PPT");  Williams Automotive,  Inc.; GeoFocus, Inc.
("GeoFocus");   NESC  Williams,  Inc.  ("NESC");  Williams  Technologies,   Inc.
("Technologies");  Williams  World Trade,  Inc.  ("WWT");  Kenco/Williams,  Inc.
("Kenco");  Techwood Williams, Inc. ("TWI");  Agrotec Williams, Inc. ("Agrotec")
and its 80% owned  subsidiaries  Hardee Williams,  Inc.  ("Hardee") and Waccamaw
Wheel  Williams,  Inc.  ("Waccamaw")  is herein  referred to as the "Company" or
"Registrant". The subsidiaries are detailed as follows:


Vehicle Components

Williams  Controls  Industries,   Inc.:  Manufactures  vehicle  components  sold
primarily in the transportation industry.


Premier Plastic  Technologies,  Inc.:  Manufactures  plastic  components for the
automotive industry and manufactures  prototype and production molds using rapid
prototyping processes.


NESC  Williams,  Inc.:  Installs  conversion  kits  to  allow  vehicles  to  use
compressed natural gas and provides natural gas well metering services.


Williams  Automotive,  Inc.:  Markets the Company's  products to the  automotive
industry.



Electrical  Components  and GPS Aptek  Williams,  Inc.:  Develops  and  produces
microcircuits,   cable  assemblies  and  other   electronic   products  for  the
telecommunications  and the transportation  industry,  and conducts research and
development  activities to develop  commercial  applications  of sensor  related
products for the subsidiaries of the Company.


GeoFocus,  Inc.: Develops train tracking and cyber-farming  systems using global
positioning systems ("GPS") and geographical information systems ("GIS").



Agricultural Equipment

Agrotec Williams,  Inc.:  Manufactures  spraying  equipment for the professional
lawn care and nursery and pest control industries.


Hardee Williams,  Inc.: Manufactures equipment used in farming, highway and park
maintenance.


Waccamaw Wheel Williams,  Inc.:  Manufactures solid rubber tail wheels and other
rubber  products,  used on agricultural  equipment,  from recycled truck and bus
tires.


Techwood Williams,  Inc.:  Manufactured and distributed commercial wood chippers
used in landscaping  and farming.  Techwood ceased  manufacturing  operations in
fiscal 1997.

                                       24
<PAGE>
Notes to Consolidated Financial Statements

Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)

Automotive Accessories

Kenco/Williams,  Inc.: Manufactures,  assembles,  packages and distributes truck
and auto accessories for the aftermarket parts industries.  Kenco is reported as
a discontinued operation.



                                       25
<PAGE>
Notes to Consolidated Financial Statements

Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)


Other Subsidiaries

Williams  Technologies,  Inc.:  Supports  all  subsidiaries  of the  Company  by
providing   research  and   development   and  developing   strategic   business
relationships to promote "technology partnering."


Williams  World Trade,  Inc.:  Located in Kuala  Lumpur,  Malaysia,  WWT manages
foreign  sourcing for  subsidiaries  of the Company,  affiliates and third party
customers.


Note 2. Significant Accounting Policies


Principles of Consolidation - The consolidated  financial statements include all
of  the  accounts  of  the  Company  and  its   subsidiaries.   All  significant
intercompany accounts and transactions have been eliminated.

Cash and Cash Equivalents - All short-term highly liquid  investments  purchased
with an original  maturity  of three  months or less are  considered  to be cash
equivalents.

Inventories - Inventories are valued at the lower of cost (first-in,  first-out)
or market.

Property,  Plant and Equipment - Land, buildings,  equipment and improvements to
existing  facilities are recorded at cost.  Maintenance and repairs are expensed
as incurred.  Depreciation has been computed using the straight-line method over
the estimated useful lives of property and equipment as follows:  buildings 31.5
years, furniture,  machinery and equipment 3 to 12 years. Capitalized leases are
amortized  using the same method over the shorter of the estimated  useful lives
or the lease term.

Goodwill  - The excess of cost over net assets of  acquired  companies  is being
amortized using the straight-line method over periods not exceeding 40 years. At
each  balance  sheet  date,  management  assesses  whether  there  has  been  an
impairment  in the carrying  value of cost in excess of net assets of businesses
acquired,  primarily by comparing current and projected sales,  operating income
and annual  cash  flows,  on an  undiscounted  basis,  with the  related  annual
amortization expenses as well as considering the equity of such companies.

Concentration of Risk - The Company invests a portion of its excess cash in debt
instruments  of  financial  institutions  with  strong  credit  ratings  and has
established  guidelines relative to diversification and maturities that maintain
safety and  liquidity.  The Company has not  experienced  any losses on its cash
equivalents.

The Company sells its products to customers in diversified industries worldwide;
however,  approximately  77% of its  sales  from  continuing  operations  are to
customers in the vehicle component segment.

For the years ended  September 30, 1997, 1996 and 1995,  Freightliner  accounted
for 13%,  14% and 17% of net sales  from  continuing  operations,  respectively.
Navistar  and  Volvo  each  accounted  for  11% of  net  sales  from  continuing
operations in fiscal 1997 and fiscal 1996 and 11% and 8%, respectively in fiscal
1995.  Approximately 11%, 15% and 18% of net sales from continuing operations in
fiscal 1997, 1996 and 1995  respectively were to customers outside of the United
States,  primarily in Canada,  and, to a lesser extent, in Europe and Australia.
See note 13 of Notes to Consolidated Financial Statements.

The Company  performs  ongoing credit  evaluations  of its customers'  financial
condition and maintains  allowances for potential credit losses.  In the opinion
of management, actual losses and allowances have been within its expectations.

  
                                       26

<PAGE>
Notes to Consolidated Financial Statements

Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)

Debt  Issuance  Costs - Costs  incurred in the  issuance of debt  financing  are
amortized over the term of the debt agreement.


                                       27
<PAGE>
Notes to Consolidated Financial Statements

Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)

Product Warranty - The Company provides a warranty covering defects arising from
products sold.  The warranty is limited to a specified  time period,  mileage or
hours of use, and varies by product and application.  The Company has provided a
reserve,  which in the opinion of  management is adequate to cover such warranty
costs.  Actual product warranty costs have not differed  materially from accrued
estimated amounts.

Research and Development  Costs - Research and development costs are expensed as
incurred.

Income Taxes - Deferred tax assets and liabilities are recognized for the future
tax  consequences  attributable to differences  between the financial  statement
carrying  amounts of existing assets and  liabilities  and their  respective tax
bases.  Deferred tax assets and liabilities are measured using enacted tax rates
expected  to apply to  taxable  income  in the  years in which  those  temporary
differences are expected to be recovered or settled.  The effect on deferred tax
assets  and  liabilities  of  a  change  in  tax  rates  is  recognized  in  the
consolidated  statement of  operations in the period that includes the enactment
date.

Post-retirement  Benefits - Statement of Financial Accounting Standards ("SFAS")
No.  106,  "Employers"  Accounting  for  Post  Retirement  Benefits  Other  than
Pensions"  requires the Company to accrue  retiree  insurance  benefits over the
period  in which  employees  become  eligible  for such  benefits.  The  Company
implemented  SFAS No. 106 by amortizing  the transition  obligation  over twenty
years.

Earnings  per  Share -  Earnings  per  share  are  computed  on the basis of the
weighted average number of shares  outstanding plus the common stock equivalents
which would arise from the exercise of stock options and  warrants.  Primary and
fully diluted earnings per share are the same for 1997, 1996 and 1995.

Reclassifications  - Certain  amounts  previously  reported in the 1995 and 1996
financial  statements  have  been  reclassified  to  conform  to 1997  financial
statement classifications.

Fair Value of  Financial  Instruments  - The  carrying  values of the  Company's
current assets and liabilities  approximate fair values primarily because of the
short maturity of these instruments.  The fair values of the Company's long-term
debt  approximated  its  carrying  values  based on  borrowing  rates  currently
available  to the  Company  for loans  with  similar  terms.  The fair  value of
receivables  from  an  affiliate  is  not  practicable  to  estimate  due to the
indefinite  payment terms and due to the related party nature of the  underlying
transaction.

Stock-Based   Compensation  -  SFAS  No.  123,   "Accounting   for   Stock-Based
Compensation,"  ("SFAS 123") allows  companies to choose  whether to account for
stock-based  compensation on a fair value method, or to continue  accounting for
such  compensation  under the method  prescribed in Accounting  Principles Board
Opinion No. 25,  "Accounting  for Stock  Issued to  Employees"  ("APB 25").  The
Company has chosen to continue to account for stock-based compensation using APB
25 (see Note 9). If the accounting  provisions of SFAS 123 had been adopted, the
effect on net income would have been immaterial.

Recent FASB Pronouncements - The Financial  Accounting  Standards Board ("FASB")
recently  issued SFAS No. 128,  "Earnings  Per Share",  which is  effective  for
fiscal years  ending  after  December  15,  1997.  This  statement  replaces the
presentation of primary  earnings per share ("EPS") with a presentation of basic
EPS. It also requires dual  presentation of basic and diluted EPS on the face of
the income  statement  for all entities  with  complex  capital  structures  and
requires  reconciliation  of the  numerator  and  denominator  of the  basic EPS
computations  to the numerator and  denominator of the diluted EPS  computation.
Basic EPS excludes  dilution.  Diluted EPS reflects the potential  dilution that
could  occur  if  securities  or other  contracts  to issue  common  stock  were
exercised or  converted  into common stock or resulted in the issuance of common
stock that then  shared the  earnings  of the  entity.  Diluted  EPS is computed
similar to fully diluted EPS. SFAS No. 128 requires  restatement of all EPS data
that was  presented  in  previously  filed  reports.  Management  believes  that
implementation  of SFAS No. 128 will not have a material  effect on earnings per
share.

                                       28
<PAGE>
Notes to Consolidated Financial Statements

Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)


The FASB also recently issued SFAS No.'s 130 and 131,  "Reporting  Comprehensive
Income"  and   "Disclosures   about   Segments  of  an  Enterprise  and  Related
Information,"  respectively.  Both of these  statements are effective for fiscal
years beginning  after December 15, 1997. SFAS No. 130 establishes  requirements
for disclosure of  comprehensive  income which includes certain items previously
not included in the  statement of income  including  minimum  pension  liability
adjustments  and  foreign  currency  translation   adjustments,   among  others.
Reclassification  of earlier  financial  statements for comparative  purposes is
required.  SFAS No. 131 revises  existing  standards for  reporting  information
about operating  segments and requires the reporting of selected  information in
interim financial reports.  SFAS No. 131 also establishes  standards for related
disclosures about products and services,  geographic areas, and major customers.
Management  believes  that  implementation  of SFAS No. 130 and No. 131 will not
materially affect the Company's financial statements.

Use of Estimates in the Preparation of Financial Statements - The preparation of
financial statements in conformity with generally accepted accounting principles
requires  management to make estimates and assumptions  that affect the reported
amounts  of assets and  liabilities  and  disclosure  of  contingent  assets and
liabilities at the date of the financial  statements and the reported amounts of
revenues and  expenses  during the  reporting  periods.  Management  makes these
estimates  using the best  information  available at the time the  estimates are
made; however, actual results could differ materially from these estimates.



Note 3. Inventories

Inventories consisted of the following: 

                                             1997           1996
                                           -------        -------

                    Raw material           $ 5,305        $ 7,243
                    Work in process          2,035          1,349
                    Finished goods           7,177          6,696
                                           -------        -------  
                                           $14,517        $15,288


Finished goods include component parts and finished product ready for shipment.

Note 4. Investment in and Receivables from Affiliate

Prior to July 1995, the Company had a loan receivable from Ajay Sports, Inc. and
its subsidiaries  ("Ajay").  In October 1994, the Company  exercised  options to
acquire  4,117,647  shares of Ajay common stock  through a reduction in the loan
receivable.  At September 30, 1997,  the Company owns  4,117,647  shares of Ajay
common stock,  which represents  approximately 18% of Ajay's  outstanding common
stock. Ajay manufactures and distributes golf accessories primarily to retailers
throughout  the  United  States.  The  investment  in  Ajay  is  recorded  as an
investment in affiliate in the  Consolidated  Balance Sheet net of the Company's
equity interest in Ajay's losses since acquisition  ($384, $175 and $282 for the
years ended  September 30, 1997,  1996 and 1995,  respectively).  The Company is
required  to account  for the  investment  in Ajay on the  equity  method due to
common  ownership by the  Chairman and  President of the Company who is also the
Chairman and President of Ajay.

In addition,  the Company had  guaranteed  Ajay's  $13,500  credit  facility and
charged  Ajay a fee of 1/2 of 1% per annum on the  outstanding  loan  amount for
providing  this  guaranty  through July 11, 1997.  At  September  30, 1997,  the
Company also has manufacturing  rights in certain Ajay facilities  through 2002,
under a joint venture  agreement,  and the Company has vested options to acquire
11,110,873  shares of Ajay common  stock at prices  ranging from $.34 to .50 per
share.



                                       29
<PAGE>
Notes to Consolidated Financial Statements

Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)

The Company had guaranteed Ajay's $13,500 credit facility to the previous lender
("Previous  Lender") of which $12,051 was outstanding at July 11, 1997, the date
which the previous  loan was repaid with  proceeds  from a new combined loan for
the Company and Ajay (the  "Loan") with a new lender (the  "Bank").  Ajay's loan
availability  at the date of the Loan  closing  was  insufficient  to repay  the
Previous  Lender.  The previous Lender provided Ajay $2,340 of bridge  financing
and the Company  provided Ajay $2,268 at Loan closing to repay its previous loan
in full.  The expected  sources of repayment  for the bridge loan are  primarily
derived from expected financial  transactions of the Company.  Therefore,  it is
likely  that Ajay will need to borrow  additional  funds from the Company in the
future to repay the  bridge  loan to the extent  that the bridge  loan is repaid
with Company funds. As a condition to the non-interest bearing loans made by the
Company to Ajay,  Ajay  granted  the  Company a security  interest in all of the
assets of Ajay subordinate to the liens of the Bank and the Previous Lender. The
Chairman of the Company has provided a guaranty to the Company for the Company's
investments  and loans to Ajay.  In addition,  the Company has agreed to provide
400,000 newly issued shares of the Company's common stock to Ajay, which will be
security for the bridge loan. Such shares have not yet been issued.  The Company
has also agreed to  purchase  approximately  $1,000 of notes  payable by Ajay to
affiliated  parties,  which  had  provided  loans to Ajay to help  Ajay  finance
operations  during the  financial  restructuring.  These  loans  were  necessary
because the Company was prohibited from  down-streaming  funds to Ajay while the
previous loan was in default.

The Company and Ajay have agreed to a plan (the "Ajay Recapitalization") whereby
Ajay plans to obtain permanent bank financing which,  when combined with a final
investment by the Company,  Ajay management has informed the Company it believes
will result in adequate  working  capital and  eliminate  any  requirements  for
further  advances or guarantees from the Company.  Ajay management  informed the
Company it has signed a proposal  letter  with a lender for an asset  based loan
which,  Ajay  management  has informed  the Company  that it believes,  based on
expected loan advance rates, would leave Ajay approximately  $2,000 short of its
projected  minimum  working  capital needs.  The Company intends to invest up to
$2,000 to provide Ajay adequate working capital, of which  approximately  $1,000
will be required in  February  1998.  If Ajay  successfully  completes  its bank
financing, the Company has agreed to exchange up to $4,000 of loans and advances
into  convertible  voting preferred stock which Ajay management has informed the
Company  that it  believes  will  allow  Ajay  to meet  the  minimum  net  worth
requirement,  which is one of the criteria for continued  listing on the NASDAQ.
As presently  proposed,  the preferred  stock will pay a dividend rate of 9% and
would be  convertible  into up to  12,000,000  shares of Ajay common  stock.  As
presently  proposed,  the dividend rate will increase two percentage points each
in the year 2002 and 2003 if Ajay does not achieve pre-tax  earnings of at least
$500 in the two consecutive years prior to 2002 and 2003.

Following is a summary of condensed unaudited  financial  information of Ajay as
of and for the twelve months ended September 30, 1997, 1996 and 1995:


                             1997                  1996                 1995
                         -----------           -----------          ----------- 
                         (unaudited)           (unaudited)          (unaudited)


Current assets            $ 14,264              $ 13,951              $ 9,405
Other assets                 4,449                 4,101                1,577
                         -----------           -----------          ----------- 
                          $ 18,713              $ 18,052              $10,982
                         ===========           ===========          ===========

Current liabilities       $  5,031              $ 14,207              $ 2,870
Other liabilities           12,061                    17                3,600
Stockholders' equity         1,621                 3,828                4,512
                         -----------           -----------          ----------- 
                          $ 18,713              $ 18,052              $10,982
                         ===========           ===========          ===========

Net sales                 $ 29,063              $ 24,669              $15,645
Gross margin              $  3,772              $  4,412              $ 2,083
                         -----------           -----------          ----------- 
Net loss                  $ (2,133)             $   (985)             $(1,565)
                         ===========           ===========          ===========


                                       30
<PAGE>
Notes to Consolidated Financial Statements

Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)

If valued at the September 30, 1997 quoted closing price of publicly traded Ajay
shares,  the value of the Company's  investment  in Ajay would be  approximately
$774.  At  September  30,  1997 Ajay had  approximately  $4,212  of  outstanding
preferred stock that is convertible to  approximately  8,000,000  shares of Ajay
common stock and outstanding  options and warrants (in addition to the Company's
options)  to purchase  approximately  4,200,000  shares of Ajay common  stock at
prices ranging from $.34 to $1.00 per share (unaudited).


                                       31
<PAGE>
Notes to Consolidated Financial Statements

Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)

Note 5. Debt


On July 11, 1997,  the Company and Ajay  refinanced  their bank debt with a bank
("the Bank") under a $34,088 three-year revolving credit and term loan agreement
("the  Loan").  Accordingly,  the Company has reported  bank debt as a long-term
liability as of September 30, 1997. At the date of the Loan closing, the Company
borrowed a total of $17,141 which was  comprised of $9,619 of  borrowings  under
the $26,000 revolving loan facility (the "Revolver"), $2,658 under a real estate
term loan ("Real Estate  Loan"),  $3,864 under a machinery  and  equipment  loan
("Term Loan I"),  and $1,000  under a term loan ("Term Loan II").  The Loan is a
joint and several  obligation  of the Company and Ajay.  At the date of the Loan
closing,  Ajay  borrowed a total of $7,391,  which was comprised of $6,825 under
the  Revolver  and $566  under Term Loan I (a total of $6,280 at  September  30,
1997).  The proceeds from the Company's and Ajay's  borrowings plus cash on hand
were used to repay  the  Previous  Lender.  In  addition,  the  Previous  Lender
provided bridge financing of $2,340 to Ajay which is to be repaid primarily from
the proceeds of the sale of Kenco, the sale of other assets, or from a specified
percentage of future  combined Ajay and the Company's  cash flow.  The Company's
Chairman has guaranteed Term Loan II to the Bank.

Under the  Revolver,  the Company and Ajay can borrow up to $26,000 based upon a
borrowing base availability  calculated using specified  percentages of eligible
accounts  receivable  and  inventory.  The Revolver bears interest at the Bank's
prime rate (8.5% at September  30, 1997) plus .5%. The Real Estate Loan and Term
Loan I bear  interest  at the  Bank's  prime rate plus  .75%.  At the  Company's
option,  the Company may borrow funds under the  Revolver,  the Real Estate Loan
and the Term Loan I at the London InterBank  Offering Rate ("Libor") plus 2.75%,
3% and 3%, respectively.  The Revolver,  Real Estate Loan and Term Loan I mature
on July 14,  2000 and are  secured  by  substantially  all of the  assets of the
Company and Ajay. The real estate term loan is being amortized over twenty years
and Term Loan I is being amortized over seven years with all remaining principal
outstanding  due at the July 11, 2000. Term Loan II matures on June 1, 1999 with
principal payments based upon an amortization  period of twenty four months plus
additional  principal  payments  equal to any excess  proceeds  from the sale of
Kenco after repayment of any Revolver due on Kenco plus principal payments equal
to 50% of the  Company's and Ajay's annual  consolidated  excess cash flow.  The
loan agreement  prohibits payment of any dividends by the Company,  requires the
Company and Ajay in the aggregate to maintain minimum working capital of $25,000
exclusive of the Revolver  and minimum  tangible net worth of $11,000.  The Loan
also  prohibits  additional  indebtedness  and  common  stock  repurchases,  and
restricts  combined  Company  and Ajay annual  capital  spending  and  increased
operating lease obligations to $2,500 and $600, respectively. The loan agreement
imposes a prepayment  penalty declining from 3% in the first year of the loan to
 .5% in the year 2000 which is waived if the loan is repaid  with  proceeds  from
the sale of assets or is refinanced  with an affiliate of the Bank.  The Company
had $488 of availability under the revolving loan as of September 30, 1997.


                                       32
<PAGE>

Notes to Consolidated Financial Statements

Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
<S>                                                                              <C>           <C>    

The Company's long-term debt consists of the following:                            1997          1996
                                                                                 --------      --------
Bank revolving credit facility due on July 11, 2000;  variable interest          $ 9,498             -
rate (9.0% at September 30, 1997)

Bank Term Loan I, due on July 11, 2000,  variable  interest rate 9.25%,            3,818             -
payable in monthly  installments  of $46, with a remaining  balance due
of $ 2,300 at maturity

Bank Term Loan II,  due on June 1, 1999  variable  interest  rate 9.5%,              958             -
payable in monthly  installments  of $42, with a remaining  balance due          
of $83 at maturity  

Real Estate loan, due on July 11, 2000,  variable  interest rate 9.25%,            2,647             -
payable in monthly  installments  of $11, with a remaining  balance due
of $2,270 at maturity

Mortgage loan, due in 1998;  variable  interest rate (9.5% at September              775           875
30, 1997), payable in monthly installments of $8 plus interest
 
Sale leaseback  financing,  due in 2003, 8.0% interest rate, payable in            4,526             -
monthly installments of $38, including interest

Mortgage  loan,  due in 2003,  8.8% interest  rate,  payable in monthly            1,178         1,321
installments of $21 including interest

Unsecured  subordinated  note  payable,  due in 2005,  interest only at              750           750
prime (8.50% at September 30, 1997)

Other                                                                                135            48       
                                                                                 --------      --------
                                                                                  24,285         2,994
     Less current portion                                                          1,428           212
                                                                                 --------      --------
                                                                                 $22,857       $ 2,782
                                                                                 ========      ========

</TABLE>

Maturities of long-term debt are as follows:

          1998                $     1,428
          1999                      1,457
          2000                     14,883
          2001                        307
          2002                      4,852
       Thereafter                   1,358
                              -----------
                              $    24,285
                              ===========


                                       33
<PAGE>
Notes to Consolidated Financial Statements

Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)

Note 6. Pension Plans

The Company maintains two pension plans; one plan covers the salaried  employees
and the other plan covers the Company's  hourly  employees.  Annual net periodic
pension costs under the pension plans are determined on an actuarial  basis. The
Company's  policy is to fund these costs  accrued over 15 years and  obligations
arising  due to plan  amendments  over the  period  benefited.  The  assets  and
liabilities are adjusted annually based on actuarial  results.  Net pension cost
is computed as follows:


                                              1997          1996          1995
                                              -----         -----         -----
           Service cost                       $ 227         $ 226         $ 169
           Interest cost                        451           450           388
           Actual return on plan assets        (476)         (477)         (360)
           Other components                      21            21            29
                                              -----         -----         -----
                                              $ 223         $ 220         $ 226
                                              =====         =====         =====

The expected  long-term rate of return on plan assets is 9.0%. The discount rate
and rate of  increase in future  compensation  levels  used in  determining  the
actuarial present value of accumulated  benefit obligations was 7.5% and 5.0% in
1997,  8.0%  and 5.0% in 1996,  and  8.5% and 5.0% in 1995,  respectively.  Plan
assets consist substantially of equity and fixed income securities.


                                       34
<PAGE>
Notes to Consolidated Financial Statements

Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)


SFAS No. 87  requires  recognition  in the  balance  sheet of a minimum  pension
liability for underfunded  plans. The minimum  liability that must be recognized
is equal to the excess of the accumulated  benefit  obligation over plan assets.
At  September  30,  1997  and  1996  the  minimum  liability  for the  Company's
underfunded plan was $0 and $228, respectively.

The funded status as of September 30 is as follows:

                                                        Salaried         Hourly
                                                        Employees      Employees
1997                                                      Plan            Plan
----                                                    ---------      ---------

Actuarial  present value of vested  benefits             $ 2,418        $ 2,792 
Actuarial  present value of non-vested benefits              112            534
                                                        ---------      ---------
Accumulated benefits obligation                            2,530          3,326
                                                        =========      =========

Actuarial present value of projected benefits obligation  (2,901)        (3,606)
Plan assets at fair market value                           3,091          3,379
                                                        ---------      ---------
Funded status                                                190           (227)
                                                        =========      =========

Unrecognized net (losses) gain                               226            (99)
Prior service costs                                          138           (374)
Prepaid (accrued) pension cost                              (174)           246
                                                        ---------      ---------
Funded status                                            $   190        $  (227)
                                                        =========      =========

                                                        Salaried         Hourly
                                                        Employees      Employees
1997                                                      Plan            Plan
----                                                    ---------      ---------

Actuarial present value of vested benefits               $ 2,173        $ 2,558
Actuarial present value of non-vested benefits                80            457
                                                        ---------      ---------
Accumulated benefits obligation                            2,253          3,015
                                                        =========      =========

Actuarial present value of projected benefits obligation  (2,667)        (3,053)
Plan assets at fair market value                           2,634          2,669
                                                        ---------      ---------
Funded status                                                (33)          (384)
                                                        =========      =========

Unrecognized net losses                                      (89)          (228)
Prior service costs                                          150           (316)
Prepaid (accrued) pension cost                               (94)           160
                                                        ---------      ---------
Funded status                                            $   (33)        $ (384)
                                                        =========      =========

                                       35
<PAGE>
Notes to Consolidated Financial Statements

Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)


Note 7. Property, Plant and Equipment

At September 30, 1997 and 1996,  property,  plant and  equipment  consist of the
following:

                                                     1997                1996
                                                   --------            ---------
     Land and land improvements                    $  2,750            $  2,742
     Buildings                                        9,466               9,407
     Machinery and equipment                         10,225              10,872
     Office furniture and equipment                   1,704               1,934
                                                   --------            ---------
                                                     24,145              24,955
     Less accumulated depreciation                   (6,065)             (5,154)
                                                   --------            ---------
                                                   $ 18,080            $ 19,801
                                                   ========            =========

Net  property,  plant and  equipment of $18,080 at September  30, 1997  excludes
certain machinery, equipment and office equipment held for disposition.


Note 8. Income Taxes (benefit)

The provision for income taxes (benefit) is as follows:

                                          1997          1996          1995
                                        --------      --------      --------
Continuing operations:
  Current                               $ 2,523       $ 1,996       $ 2,941
  Deferred                               (1,368)         (491)          167
                                        --------      --------      --------
                                          1,155         1,505         3,108
                                                                          
Discontinued operations                  (2,121)       (1,885)         (283)
                                        --------      --------      --------
                                        $  (966)      $  (380)      $ 2,825
                                        ========      ========      ========

The reconciliation  between the effective tax rate and the statutory federal tax
rate on earnings from continuing operations as a percent is as follows:

                                          1997          1996          1995
                                        --------      --------      --------

Statutory federal income tax rate         34.0          34.0          34.0
State taxes, net of federal income tax                        
   benefit                                 4.0           4.0           4.0
Effect of change in valuation allowance   17.1         
Other                                      1.5           1.5            .2
                                        --------      --------      --------
                                          56.6          39.5          38.2
                                        ========      ========      ========


                                       36
<PAGE>
Notes to Consolidated Financial Statements

Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)


The tax effects of temporary  differences that give rise to significant portions
of the deferred tax assets and deferred tax  liabilities  at September  30, 1997
and 1996 are as follows:



                                                     1997                1996
                                                   --------            --------
Deferred tax assets:
Inventories, due to obsolescence reserve 
  and additional costs inventoried for 
  tax purposes pursuant to the 
  Tax Reform Act of 1986                           $   431             $   385

Accrual for compensated absences                       145                 108
Accrual for retiree medical benefits                   383                 345
Accounts receivable reserves                           138                 389
Estimated loss on disposal                             189                   -
Equity interest in loss on affiliate                   320                 174
Tax gain on sale/leaseback                             659                   -
Accrued other reserves                                 144                 138
State net operating loss carryforwards                 727                 480
                                                   --------            --------

Total gross deferred tax assets                      3,136               2,019 
Less valuation allowance                               620                 270 
                                                   --------            --------
Net deferred tax assets                              2,516               1,749
                                                   --------            --------

Deferred tax liabilities:
  Plant and equipment, principally due 
  to differences in depreciation and
  amortization                                       1,485               1,219
                                                   --------            --------

Net deferred income tax asset                      $ 1,031             $   530
                                                   ========            ========

Current deferred income tax assets                 $ 1,098             $ 1,020
Long-term deferred income tax assets, net            1,418                 729
Long-term deferred income tax liabilities           (1,485)             (1,219)
                                                   --------            --------
                                                   $ 1,031             $   530
                                                   ========            ========


At  September  30,  1997,  the  Company has  approximately  $12,000 of state net
operating  loss carry  forwards,  which are  available to the Company in certain
state tax  jurisdictions  and expire in 2006 through 2012. During the year ended
September  30, 1997,  the Company  increased  its  valuation  allowance  against
certain state net operating loss carryforwards it does not expect to utilize.




                                       37
<PAGE>
Notes to Consolidated Financial Statements

Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)

Note 9. Stock Option Plans


The Company has issued  stock  options and warrants at exercise  prices  ranging
from $.34 - 3.63 per share,  the  market  value at the date of  issuance.  These
options and warrants  expire between 1998 and 2000.  This stock option  activity
during the periods indicated are as follows:

                                                  Shares      Option Prices
                                                  -------     -------------
Outstanding at September 30, 1994                 755,000     $        .46

Granted                                            40,000             3.63
Exercised                                               -                -
Canceled                                                -                -
                                                  -------     -------------
Outstanding at September 30, 1995                 795,000       .46 - 3.63

Granted                                                 -                -      
Exercised                                        (455,000)             .52
Canceled                                                -                -
                                                  -------     -------------
Outstanding at September 30, 1996                 340,000       .46 - 3.63

Granted                                                 -                -
Exercised                                               -                -
Canceled                                                -                -
                                                  -------     -------------
Outstanding at September 30, 1997                 340,000     $ .46 - 3.63
                                                  =======     =============


The Company  extended the  expiration  date of 150,000  options held by Acrodyne
Corporation,  a related  party from  November 8, 1997 to  November  8, 1999.  

In  addition  to the  stock  options  noted  above,  the  Company  has two other
qualified  stock option  plans.  The Company  adopted the 1993 Stock Option Plan
("the 1993  Plan")  which  reserves  an  aggregate  of  1,500,000  shares of the
Company's common stock for the issuance of stock options which may be granted to
employees,  officers and directors of and consultants to the Company.  Under the
terms of the 1993 Plan,  the  Company  may grant  "incentive  stock  options" or
"non-qualified  options" at not less than the fair  market  value on the date of
grant.  Options  granted under the 1993 Plan are exercisable as to 25 percent of
the shares covered  thereby  commencing six months after the earlier of the date
of grant or the date of employment,  and as to an additional 25%,  cumulatively,
on the first,  second and third  anniversaries  of the date of grant, and expire
ten years  after the date of grant.  At  September  30,  1997,  the  Company had
388,125 shares  available for future grants.  Stock option  activity  during the
periods indicated under the 1993 Plan are as follows:


                                       38
<PAGE>
Notes to Consolidated Financial Statements

Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)

                                                  Shares      Option Prices
                                                ----------    -------------
Outstanding at September 30, 1994                 458,000     $1.63 - 3.23
Granted                                            10,000             3.23
Exercised                                               -                -
Canceled                                                -                -
                                                ----------   -------------
Outstanding at September 30, 1995                 468,000      1.63 - 3.23

Granted                                                 -                - 
Exercised                                               -                - 
Canceled                                          (68,000)     1.63 - 3.23
                                                ----------    -------------
Outstanding at September 30, 1996                 400,000      1.63 - 3.23

Granted                                         1,078,800             1.94
Exercised                                               -                -
Canceled                                         (366,925)     1.63 - 3.23
                                                ----------    -------------
Outstanding at September 30, 1997               1,111,875      1.63 - 3.23
                                                ==========    =============




                                       39
<PAGE>
Notes to Consolidated Financial Statements

Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)

During 1996 the  shareholders of the Company  approved a stock option plan which
reserves an aggregate of 200,000 shares of the Company's stock for  non-employee
Directors of the Company (the "1995 Plan"). The 1995 Plan provides for automatic
granting  of 10,000  options to each  non-employee  director of the Company at a
price  equal to the market  value on the date of grant  which is the date of the
annual shareholders' meeting each year,  exercisable for 10 years after the date
of the grant.  These options are  exercisable as to 25% of the shares thereby on
the date of grant and as to an additional 25%, cumulatively on the first, second
and third  anniversaries  of the date of grant. At September 30, 1997 there were
110,000 shares available for grant under the 1995 Plan.

Stock option  activity  during the periods  indicated under the 1995 Plan are as
follows:

                                                  Shares      Option Prices
                                                ----------    -------------
Outstanding at September 30, 1994                       -     $          -
         

Granted                                            30,000             3.66
Exercised                                               -                -
Canceled                                                -                -
                                                ----------    -------------
Outstanding at September 30, 1995                  30,000             3.66


Granted                                            30,000             3.63
Exercised                                               -                -
Canceled                                                -                -
                                                ----------    -------------
Outstanding at September 30, 1996                  60,000        3.63-3.66


Granted                                            30,000             2.66
Exercised                                               -                -
Canceled                                                -                -
                                                ----------    -------------
Outstanding at September 30, 1997                  90,000     $  2.66-3.66
                                                ==========    =============




                                       40
<PAGE>
Notes to Consolidated Financial Statements

Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)


Note 10. Stock Repurchase Program

In  January  1996 the  Company  initiated  a stock  repurchase  program of up to
1,000,000  shares of its  common  stock.  Under this  program  the  Company  has
acquired  195,200  shares  during  fiscal 1996 at an average  price of $2.77 per
share,  which  include  100,000  shares  of  common  stock  at $2.75  per  share
representing  the market  price on the date  purchased  from  Enercorp,  Inc., a
publicly-held business development company which beneficially owns approximately
11% of the  Company's  stock.  The  Chairman  and  President of the Company is a
significant  shareholder of Enercorp.  During the year ended September 30, 1997,
the Company issued 65,000  treasury  shares at $2.50 per share to Enercorp and a
consultant for acquisition  advisory work. The Loan prohibits  further purchases
under this program.


Note 11. Discontinued Operations/Restructuring Charge

In July  1996,  the  Company  adopted a  restructuring  plan for its  automotive
accessories  business  and recorded a  restructuring  charge of $2,250 in fiscal
1996.  The  restructuring   provision  primarily  represented  non-cash,   asset
write-offs related to product line restructuring.

On May 8, 1997,  the Company  signed a letter of intent to sell Kenco,  which is
the sole business in the automotive accessories segment.  Accordingly,  Kenco is
reported as a discontinued operation in the statement of operations.  The letter
of intent  expired,  and the  Company  did not renew it;  however,  the  Company
intends to continue working with the potential buyer towards closing the sale of
Kenco, and also may enter into preliminary discussions with possible alternative
buyers.  The  Company  anticipates  that  Kenco  will be sold  during the second
quarter of fiscal 1998, but there is no assurance  that the sale will occur.  In
the event that the sale does not occur,  the Company will consider all strategic
alternatives  for  reduction  of  operating   losses  including  sale,   merger,
liquidation or abandonment.  Based upon the current  proposed terms of the sale,
the purchaser will acquire  certain  assets,  excluding  Kenco's  finished goods
inventory and  manufacturing and warehousing  facility,  for $1,000 to $2,000 in
cash,  issue the Company  certain equity  securities in the company owned by the
proposed  buyer,  and  assumption of  liabilities  for trade  payables and other
current liabilities.  Under the proposed  transaction,  the Company will own and
warehouse the Kenco  finished  goods  inventory  and sell such  inventory to the
purchaser  during the nine months  following the  acquisition  on 60-day payment
terms.  The purchaser will be obligated to purchase any unsold  inventory at the
end of the nine-month period.

The  summarized  results  for  Kenco  for the years  ended  September  30 are as
follows:
 
 
                                                1997        1996         1995
                                              --------    --------     --------

Net sales                                     $  8,666    $ 16,043     $ 15,863
                                              ========    ========     ========

Loss from operations before allocated
  interest expense and income tax benefit       (1,727)     (4,353)        (286)
Allocated interest expense                        (290)       (456)        (456)
                                              --------    --------     --------
Loss from operations before income tax benefit  (2,017)     (4,809)        (742)
Income tax benefit                                 810       1,885          283
                                              --------    --------     --------
Loss from operations                            (1,207)     (2,924)        (459)

Loss on disposal before interest
  and income taxes                              (2,771)          -            -
Allocated interest expense                        (505)          -            -
                                              --------    --------     --------
Loss on disposal before
  income tax benefit                            (3,276)          -            -
Income tax benefit                               1,311           -            -
                                              --------    --------     --------
Loss on disposal                                (1,965)          -            -
                                              --------    --------     --------
Total loss on discontinued operations         $ (3,172)   $ (2,924)    $   (459)
                                              ========    ========     ========




                                       41
<PAGE>
Notes to Consolidated Financial Statements

Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)

The estimated  pre-tax loss on disposal of $3,276  includes  $1,952 of estimated
future  operating  losses of which $500  remains as an  estimated  liability  at
September 30, 1997. The Company has elected to include estimated  interest costs
in its estimated  loss on disposal  based upon the expected debt  reduction from
the proceeds and the current rate of interest.


The  net  assets  and  liabilities  of  the  discontinued  operations  held  for
disposition included in the accompanying balance sheet as of September 30, 1997,
are as follows:



           Current assets (liabilities):
              Accounts receivable                         $ 1,673
              Prepaid assets                                  257
              Accounts payable                               (970)
              Accrued expenses and other                     (322)
                                                          --------
               Net current assets                         $   638
                                                          ========

           Long term assets (liabilities):
              Machinery and equipment, net                $ 1,185
              Office equipment, net                           254
              Other assets                                    183
              Long term liabilities                           (12)
                                                          --------
               Net long term liabilities                  $ 1,610
                                                          ========





                                       42
<PAGE>
Notes to Consolidated Financial Statements

Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)


Note 12. Business Segment Information 
                                                     1997      1996       1995
                                                   -------    -------    -------
Net sales by classes of similar products from 
  continuing operations
Vehicle components                                 $43,078    $36,141    $34,826
Agricultural equipment (1)                           9,419     11,026      6,783
Electrical components and GPS (2)                    3,757      4,112      2,863
                                                   -------    -------    -------
                                                    56,254     51,279     44,472

Earnings (loss) from continuing operations
Vehicle components                                   7,477      6,831      8,459
Agricultural equipment (1)                          (1,988)      (578)       857
Electrical components and GPS(2)                    (1,217)      (659)       182
                                                   -------    -------    -------
                                                     4,272      5,594      9,498
                                                   =======    =======    =======
Identifiable assets
Vehicle components                                  21,281     20,003     18,624
Agricultural equipment (1)                          10,211     11,806      8,528
Electrical components and GPS(2)                    8,413       7,542      7,544
                                                   -------    -------    -------
Total assets - continuing operations                39,905     39,351     34,696
Automotive accessories - discontinued operations    11,471     13,698     12,486
                                                   -------    -------    -------
Total assets                                        51,376     53,049     47,182
                                                   =======    =======    =======

Capital expenditures
Vehicle components                                     420        532        852
Agricultural equipment (1)                             145        487        220
Electrical components and GPS(2)                       246        218         75
                                                   -------    -------    -------
Total capital expenditures - continuing operations     811      1,237      1,147
Automotive accessories - discontinued operations       330        358        536
                                                   -------    -------    -------
Total capital expenditures                           1,141      1,595      1,683
                                                   =======    =======    =======

Depreciation and amortization
Vehicle components                                     821      1,372      1,142
Agricultural equipment (1)                             239        288        121
Electrical components and GPS(2)                       315        239        119
                                                   -------    -------    -------
Total depreciation and amortization - continuing 
  operations                                         1,375      1,899      1,382
Automotive accessories - discontinued operations       231        257        256
                                                   -------    -------    -------
Total depreciation and amortization                $ 1,606    $ 2,156    $ 1,638
                                                   =======    =======    =======

(1) Primary operation acquired February 1995
(2) Primary operation acquired April 1995






                                       43
<PAGE>
Notes to Consolidated Financial Statements

Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)

Note 13. Net Sales from Continuing Operations - Geographic Region
           
                                   1997             1996          1995
                                 --------         --------      --------

           Canada                $  2,795         $  4,570      $  5,326
           Other                    3,560            3,261         2,754
                                 --------         --------      --------
           Net sales-export         6,355            7,831         8,080
           United States           49,899           43,448        36,392
                                 --------         --------      --------
           Net                   $ 56,254         $ 51,279      $ 44,472
                                 ========         ========      ========

Note 14. Other Benefit Plans

The Company  maintains an Employee  Stock  Ownership  Plan (ESOP) for  non-union
employees.  The ESOP may buy shares of the Company's  stock from time to time on
the open market or directly  from the Company.  The ESOP has been  authorized to
borrow up to $1,000 from the Company or  financial  institutions  to finance its
purchases.  At  September  30,  1997  the  outstanding  balance  of the loan was
approximately  $191 which has been used to finance the purchase of approximately
424,000 shares of common stock. The Company is required to make contributions to
the ESOP to repay the loan including interest.

The Company  sponsors  salaried  employees and union  employees  matching 401(k)
plans,  in which  eligible  employees may elect to contribute a portion of their
compensation.


Note 15. Post Retirement Benefits other than Pensions

The Company provides health care and life insurance  benefits for certain of its
retired  employees  ("Post  Retirement  Plan").  These  benefits  are subject to
deductibles,  co-payment provisions and other limitations. The Company may amend
or change the Post Retirement Plan  periodically.  The cost of these benefits is
expensed as claims are paid.

Effective  October  1,  1993  the  Company  adopted  SFAS  No.  106,  Employers'
Accounting for Post Retirement  Benefits other than Pensions ("SFAS 106").  SFAS
106  requires  companies to accrue the cost of post  retirement  health care and
life  insurance  benefits  within  employees'  active service period rather than
recognizing these costs on a cash basis as had been prior practice.

The  Company  elected  to  amortize  the  Accumulated  Post  Retirement  Benefit
obligation  at  October  1,  1993  over  twenty  years  as a  component  of post
retirement benefits expense.





                                       44
<PAGE>
Notes to Consolidated Financial Statements

Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)


In September  1997,  the Company  concluded  negotiations  of a five-year  union
contract,  which  has been  ratified  by union  members  and is  awaiting  final
signature. As a part of the contract, the Company has reduced its retiree health
care obligations and obtained cost sharing between the retired employees and the
Company for future cost increases.

The following  table provides  information on the post retirement plan status at
September 30, 1997:


Accumulated Post Retirement Benefit Obligation
   Retirees                                                     $ 1,293
   Fully eligible active participants                               579
   Other active Plan participants                                 1,094
                                                                -------
                                                                  2,966
Plan assets                                                           -
                                                                -------
Accumulated post retirement benefit
   obligation in excess of Plan assets                            2,966

Unrecognized gain                                                   687
Unrecognized prior service cost                                    (810)
Unrecognized transition obligation                               (1,835)
                                                                -------

Accrued post retirement benefit cost
   in the consolidated balance sheet                            $ 1,008
                                                                =======


Post retirement benefits expense for 1997 included the follow components:

Service cost                                                    $    74
Interest cost                                                       218
Amortization of unrecognized net obligation at transition           165
                                                                -------
Post retirement benefits expense                                $   457
                                                                =======

The assumed health care cost trend rate used in measuring the  accumulated  post
retirement  benefit obligation (APBO) ranged between 4.5%-10% in the first year,
declining to 4.5% - 5.0% after 8 years.  The discount  rate used in  determining
the APBO was 7.5%.

If the  assumed  medical  costs  trends  were  increased  by 1%,  the APBO as of
September 30, 1997 would increase by $203, and the aggregate of the services and
interest cost components of the net annual post retirement benefit cost would be
increased by $24.



                                       45
<PAGE>
Notes to Consolidated Financial Statements

Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)


Note 16. Acquisitions

In April 1996,  the Company  acquired the assets of the Burda Group of Companies
located in West Linn,  Oregon,  a distributor of a commercial  chipper line, for
$20. This company was operated as Techwood Williams,  Inc. and ceased operations
in fiscal 1997.

In April 1996, the Company also acquired the assets of Neumann Manufacturing and
Engineering,  Inc.  located in Madison  Heights,  Michigan,  a  manufacturer  of
plastic  components for the  automotive  industry,  for $1,200.  This company is
being operated as Premier Plastics Technologies, Inc.

In July 1996, the Company completed the acquisition of GeoFocus, Inc. located in
Gainesville,  Florida for 150,000 shares of the Company's common stock valued at
$290.  GeoFocus develops train tracking and  cyber-farming  systems using global
positioning systems ("GPS") and geographical information systems ("GIS").

These  acquisitions  were accounted for using the purchase  method of accounting
and the results of  operations  of these  businesses  have been  included in the
consolidated results of operations of the Company from the acquisition dates.


Note 17. Sale Leaseback

In April 1997 the Company sold its Portland,  Oregon manufacturing facility in a
sale-leaseback  transaction for $4,524, less $250 withheld in an escrow fund for
possible  environmental cleanup costs. The Company may be required to repurchase
the property within one year if it cannot cure possible  environmental  problems
at the sold  property  and may be  required to finance  part of the  purchaser's
price in January 1998 if the purchaser cannot obtain permanent  financing from a
lender  who would  accept  the  environmental  condition  of the  property.  The
acquisition  agreement  between  the  Company and the  previous  building  owner
contains provisions for indemnification of any environmental cleanup costs after
the  Company  spends $25  towards  such  cleanup.  The  Company  intends to seek
indemnification  from the prior  property  owner  for  permanent  monitoring  or
cleanup  costs,  if any. The purchaser  informed the Company that it has entered
into a purchase  and sale  agreement  with a third party who would  purchase the
building without any contingent repurchase obligation subject to third party due
diligence. The Company has the right of first refusal to repurchase the building
during the first year if the purchaser  attempts to sell the property to a third
party.

The  transaction was accounted for as a financing where the property is recorded
as  an  asset  and  continues  to  be  depreciated  and  the  capitalized  lease
obligations  are  recorded  as long  term  liabilities.  The lease has a term of
fifteen years and requires minimum annual payments of $450 with rental increases
every  two years  equal to the  increase  in the  consumer  price  index for the
Portland,  Oregon area but not greater than a 5% nor less than a 3% increase for
every  two-year  period.  The  Company  has a  deferred  gain on the sale of the
building of $1,686.  At the time that the  contingent  repurchase  obligation is
eliminated,  the Company will record the  transaction as an operating  lease. At
such time, the gain on the sale will be recognized and the capitalized costs and
lease obligation will be eliminated from the balance sheet.



 




                                       46
<PAGE>
Notes to Consolidated Financial Statements

Years ended September 30, 1997, 1996, 1995
(Dollars in thousands, except share and per share amounts)

Note 18.  Quarterly Data (unaudited)
<TABLE>
<CAPTION>
<S>                                   <C>            <C>            <C>             <C>             <C>    


                                       First         Second          Third          Fourth
            1997                      Quarter        Quarter        Quarter         Quarter          Annual
            ----                      --------       --------       --------        --------        --------             

Continuing operations:
  Net sales                           $ 13,521       $ 14,248       $ 14,536        $ 13,949        $ 56,254
  Gross margin                           3,627          3,381          2,966           2,916          12,890
  Operating expenses                     2,056          2,294          2,306           1,962           8,618
                                      --------       --------       --------        --------        --------  
Earnings from continuing operations        392            391            179             173           1,135
Loss from discontinued operations         (380)          (521)        (2,271)              -          (3,172)
                                      --------       --------       --------        --------        --------  
Net earnings (loss)                   $     12       $   (130)      $ (2,092)       $    173        $ (2,037)
                                      ========       ========       ========        ========        ========

Earnings (loss) per common share
  from continuing operations          $   0.02       $   0.02       $   0.01        $    .01        $    .06

(Loss) per common share from
  discontinued operations                (0.02)         (0.02)          (.13)            .00            (.17)
                                      --------       --------       --------        --------        --------  
Earnings (loss) per common share      $    .00       $  (0.00)      $   (.12)       $    .01        $   (.11)
                                      ========       ========       ========        ========        ========
Weighted average shares outstanding     17,800         17,900         18,500          18,500          18,200
                                      ========       ========       ========        ========        ========  




                                       First         Second          Third          Fourth(1)
            1996                      Quarter        Quarter        Quarter         Quarter          Annual
            ----                      --------       --------       --------        --------        --------             
Continuing operations:
  Net sales                           $ 12,044       $ 12,598       $ 13,474        $ 13,163        $ 51,279
  Gross margin                           3,823          3,593          3,779           2,478          13,673
  Operating                              1,719          1,749          2,018           2,593           8,079
                                      --------       --------       --------        --------        --------
Earnings (loss) from operations          1,035            879            730            (281)          2,363
Loss from discontinued operation           (45)          (365)        (1,824)           (690)         (2,924)
                                      --------       --------       --------        --------        --------
Net earnings (loss)                   $    990       $    514       $ (1,094)       $   (971)       $   (561)
                                      ========       ========       ========        ========        ========  

Earnings (loss) per common share
  from continuing operations          $    .06       $    .05       $    .04        $   (.02)       $    .13
(Loss) per common share from
  discontinued operations                  .00           (.02)          (.10)           (.04)           (.16)
                                      --------       --------       --------        --------        --------
Earnings (loss) per common share      $    .06       $    .03       $   (.06)       $   (.06)       $   (.03)
                                      ========       ========       ========        ========        ========  
Weighted average shares outstanding     17,900         17,600         17,600          17,800          17,800
                                      ========       ========       ========        ========        ========  
</TABLE>
 
 
1) The fourth quarter of 1996  continuing  operations  includes the operation of
acquisitions  from  date  of  purchase.  The  results  of  operations  of  these
acquisitions are not material.  The fourth quarter of 1996 continuing operations
includes  a  $1,000  write  down  due  to an  unfavorable  inventory  adjustment
resulting  from  increased   overhead  and  production   inefficiencies  and  an
unprofitable  product line which was  discontinued in August 1996 and additional
inventory and account receivable reserves of approximately $300.

Note 19. Contingencies

The Company has  identified  certain  contaminants  in the soil of its Portland,
Oregon manufacturing  facility,  which the Company believes,  was disposed of on
the  property  by a  previous  property  owner.  The  Company  intends  to  seek
indemnification  from  such  party  for the costs of  permanent  monitoring,  or
cleanup if required. The Company has retained an environmental  consulting firm,
which  is  currently   conducting   tests  to   determine   the  extent  of  any
contamination.  The Company cannot estimate the costs of permanent monitoring or
property clean up at the present time. However, the Company believes that it can
enforce  valid  claims  against  the prior  property  owner for any costs it may
incur.




                                       47
<PAGE>


                          INDEPENDENT AUDITORS' REPORT

Board of Directors
Williams Controls, Inc.
Portland, Oregon


We have  audited  the  accompanying  consolidated  balance  sheets  of  Williams
Controls,  Inc.  and  subsidiaries  as of September  30, 1997 and 1996,  and the
related  consolidated  statements of operations,  shareholders'  equity and cash
flows for each of the years in the three-year  period ended  September 30, 1997.
These financial  statements are the responsibility of the Company's  management.
Our responsibility is to express an opinion on these financial  statements based
on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial position of Williams Controls,
Inc.  and  subsidiaries  as of September  30, 1997 and 1996,  and the results of
their  operations  and their cash flows for each of the years in the  three-year
period  ended  September  30,  1997,  in  conformity  with  generally   accepted
accounting principles.








/s/     Horwath Gelfond Hockstadt Pangburn & Co.                

HORWATH GELFOND HOCHSTADT PANGBURN & CO.



Denver, Colorado
December 18, 1997


                                       48
<PAGE>

ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
          FINANCIAL DISCLOSURE

None.

                                    Part III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

Incorporated by reference from the Company's 1998 Proxy Statement.

ITEM 11. EXECUTIVE COMPENSATION

Incorporated by reference from the Company's 1998 Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Incorporated by reference from the Company's 1998 Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated by reference from the Company's 1998 Proxy Statement.

                                     Part IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

1.   See Exhibit Index on page 47 of this Form 10-K.

2.   See Index to Financial Statements in Item 8 of this Form 10-K.

3.   See Index to Schedules on page 44 of this Form 10-K.

4.   Reports on Form 8-K.

     None.




                                       49
<PAGE>

                                   Signatures

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  caused  this report to be signed on its
behalf by the undersigned thereunto duly authorized.


WILLIAMS CONTROLS, INC.

   
     Date:     October 7, 1998             By /s/ Thomas W. Itin                
                                           -------------------------------------
                                           Thomas W. Itin, Chairman,
                                           President and Chief Executive Officer
    

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  Registrant and
in the capacities and on the dates indicated.


   
     Date:     October 7, 1998             By /s/ Thomas W. Itin          
                                           -------------------------------------
                                           Thomas W. Itin, Principal Executive
                                           Officer, Chairman, President, Chief
                                           Executive Officer and Director


     Date:     October 7, 1998             By /s/ Gerard A. Herlihy  
                                           -------------------------------------
                                           Gerard A. Herlihy
                                           Chief Financial and
                                           Administrative Officer, and 
                                           Principal Accounting Officer
                                             

     Date:     October 7, 1998             By /s/ R. William Caldwell  
                                           -------------------------------------
                                           R. William Caldwell, Director


     Date:     October 7, 1998             By  /s/ H. Samuel Greenawalt
                                           -------------------------------------
                                           H. Samuel Greenawalt, Director


     Date:     October 7, 1998             By /s/ Timothy Itin
                                           -------------------------------------
                                           Timothy Itin, Director

    

                                       50
<PAGE>

                             Williams Controls, Inc.

                               Index to Schedules






                                                                         Page


                         Independent Auditors' Report                     52

Schedule II              Valuation and Qualifying Accounts                53
























All other schedules are omitted because they are not required, not applicable or
the required information is given in the Consolidated Financial Statements.






                                       51
<PAGE>





INDEPENDENT AUDITORS' REPORT


Board of Directors
Williams Controls, Inc.
Portland, Oregon


We have audited the 1997,  1996 and 1995  consolidated  financial  statements of
Williams  Controls,  Inc.  and  subsidiaries,  referred  to in our report  dated
December  18,  1997  which  is  included  under  Item 8 in this  Form  10-K.  In
connection  with our audit of these financial  statements,  we audited the 1997,
1996 and 1995 financial  statement  schedule,  listed under Item 14 of this Form
10-K. In our opinion,  this financial statement schedule presents fairly, in all
material respects,  the information stated therein,  when considered in relation
to the financial statements taken as a whole.



                                /s/     Horwath Gelfond Hockstadt Pangburn & Co.
                                ------------------------------------------------

                                HORWATH GELFOND HOCHSTADT PANGBURN & CO.




Denver, Colorado
December 18, 1997














                                       52
<PAGE>

                             Williams Controls, Inc.

                        Valuation and Qualifying Accounts

                                   Schedule II

                             (Dollars in thousands)


                                              Beginning          Charged to
         Description                           balance            expenses
         -----------                         ----------          ----------

For Year Ended
September 30, 1997

Total reserves for doubtful accounts
  and obsolete inventory                      $   1,064           $    937
                                              =========           ========

For Year Ended
September 30, 1996

Total reserves for doubtful accounts
  and obsolete inventory                      $   2,959           $  1,691
                                              =========           ========


For Year Ended
September 30, 1995

Total reserves for doubtful accounts
  and obsolete inventory                      $     575           $  1,125
                                              =========           ========




NOTE: Valuation and qualifying accounts were not individually significant;  and,
therefore,  additions and deductions  information  has not been provided in this
schedule.








                                       53
<PAGE>



                             Williams Controls, Inc.
                                  Exhibit Index

Exhibit
Number    Description

3.1  Certificate of Incorporation of the Registrant as amended. (Incorporated by
     reference to Exhibit 3.1 to the Registrants' annual report on form 10-K for
     the fiscal year ended September 30, 1995 (the "1995 form 10-K"))


3.2  By-Laws of the Registrant. (Incorporated by reference to Exhibit 3.2 to the
     Registrant's  Registration  Statement  on Form S-18,  Registration  No. 33-
     30601-S,  as filed with the  Commission  on August 18, 1989 (the "1989 Form
     S-18"))


4.1  Specimen Unit  Certificate  (including  Specimen  Certificate for shares of
     Common Stock and Specimen  Certificate for the Warrants).  (Incorporated by
     reference  to  Exhibits  1.1  and  1.2  to  the  Registrant's  Registration
     Statement  on Form  8-A,  Commission  File  No.  0-18083,  filed  with  the
     Commission on November 1, 1989)


10.1 (a)  Indemnification  Agreement  for Thomas W. Itin ("Itin  Indemnification
     Agreement").  (Incorporated  by  reference to Exhibit 10.9 to the 1989 Form
     S-18)


10.1 (b) Amendment No. 1 to Itin  Indemnification  Agreement.  (Incorporated  by
     reference to Exhibit 10.1(b) to the Registrant's Annual Report on form 10-K
     for the Fiscal Year Ended September 30, 1993 (the "1993 Form-10K"))


10.1 (c) Form of  Indemnification  Agreement for R. William Caldwell,  H. Samuel
     Greenawalt and Timothy Itin.  (Incorporated by reference to Exhibit 10.1(c)
     to the Registrant's 1993 Form 10-K)


10.2 (a)Credit   Agreement  dated  July  11,  1997  among   Registrant  and  its
     subsidiaries and Ajay Sports,  Inc. ("Ajay") and its  subsidiaries,  all as
     borrowers,  and Wells  Fargo  Bank,  National  Association,  as lender (the
     "Credit  Agreement").  (Incorporated  by  reference  to Exhibit 10.1 to the
     Registrant's  Quarterly  Report on Form 10-Q for the period  ended June 30,
     1997 (the "June 1997 Form 10-Q"))

10.2 (b)Promissory Notes under the Credit Agreement:  (a) Revolving Credit Loans
     Promissory Note (b) Term Loan I Promissory Note (c) Term Loan II Promissory
     Note (d) Real Estate Loan Promissory Note (All incorporated by reference to
     Exhibit 10.2 to the Registrant's June 1997 Form 10-Q)




                                       54
<PAGE>

Exhibit
Number    Description

10.2(c) Mortgage and Security  Agreement between Aptek Williams,  Inc. and Wells
     Fargo Bank.  (Incorporated by reference to Exhibit 10.3 to the Registrant's
     June 1997 Form 10-Q)

10.2(d) Patent Assignment and Security Agreements for:

     (a) Williams Controls Industries,  Inc. 
     (b) Kenco Williams, Inc. 
     (c) Hardee Williams,  Inc.  
     (d) Aptek  Williams,  Inc.  
     (All  incorporated  by reference to Exhibit 10.4 to the  Registrant's  June
     1997 Form 10-Q)

10.2(e) Trademark Security Agreements for: 
     (a) Agrotec Williams, Inc.
     (b) Hardee Williams,  Inc.  
     (c) Kenco  Williams,  Inc. 
     (All  incorporated  by reference to Exhibit 10.5 to the  Registrant's  June
     1997 Form 10-Q)

10.2(f)  Continuing  Unconditional  Guaranty of Thomas W. Itin in favor of Wells
     Fargo Bank.  (Incorporated  by  reference  to Exhibit 10.6 to the June 1997
     Form 10-Q)

10.3(a)  Intercreditor  Agreement  dated  July 11,  1997  among  Registrant  and
     subsidiaries,  Ajay Sports,  Inc. and subsidiaries,  United States National
     Bank of Oregon ("US Bank"),  Thomas W. Itin and Wells Fargo Bank,  National
     Association. (Incorporated by reference to Exhibit 10.7 to the Registrant's
     June 1997 Form 10-Q)

10.3(b) Consent, Reaffirmation and Release Agreement with US Bank. (Incorporated
     by reference to Exhibit 10.8 to the Registrant's June 1997 Form 10-Q)

10.3(c)  Promissory  Note of Ajay for  $2,340,000 to US Bank.  (Incorporated  by
     reference to Exhibit 10.9 to the Registrant's June 1997 Form 10-Q)

10.3(d) Mortgage,  Assignment of Rents, Security Agreement and Fixture Filing by
     Aptek  Williams,  Inc. in favor of US Bank.  (Incorporated  by reference to
     Exhibit 10.10 to the Registrant's June 1997 Form 10-Q)

10.3(e) Guaranty to US Bank.  (Incorporated by reference to Exhibit 10.11 to the
     Registrant's June 1997 Form 10-Q)

10.4 The  Company's   1995  Stock  Option  Plan  for   Non-Employee   Directors.
     (Incorporated by referenced to Exhibit 10.3 to the  Registrant's  Quarterly
     Report on Form 10-Q for the period  ended  March 31,  1995 (the "March 1995
     Form 10-Q")

10.5 Williams/Ajay Loan and Joint Venture Implementation  Agreement dated May 6,
     1994, as amended by letter agreement dated April 3, 1995.  (Incorporated by
     reference to Exhibit 10.4 to the Registrant's March 1995 Form 10-Q)

10.6(a) Mortgage and Security  Agreement,  dated August 31, 1988, by Sparkomatic
     Corporation in favor of MetLife Capital Credit  Corporation.  (Incorporated
     by reference to Exhibit 10.7(a) to the Registrant's 1993 Form 10-K)





                                       55
<PAGE>
Exhibit
Number    Description

10.6(b) Mortgage Note in the principal  amount of  $1,700,000,  dated August 31,
     1988, from Sparkomatic  Corporation to MetLife Capital Credit  Corporation.
     (Incorporated by reference to Exhibit 10.7(b) to the Registrant's 1993 Form
     10-K)

10.6(c) Loan Assumption,  Modification and Extension  Agreement (the "Assumption
     Agreement"), dated August 12, 1993, among Kenco Williams, Inc., Sparkomatic
     Corporation  and MetLife  Capital  Corporation  and the  Guaranty  given by
     Williams to MetLife to guaranty the obligations of Kenco Williams,  Inc. to
     MetLife  thereunder.  (Incorporated  by  reference  to Exhibit  10.9 to the
     Registrant's  Post-Effective  Amendment No. 1, as filed with the Commission
     on  September   23,  1993,   on  Form  S-3  to  the  1989  Form  S-18  (the
     "Post-Effective Amendment"))

10.6(d) Guaranty  dated as of March 31, 1994 made by the  Registrant in favor of
     MetLife Capital Corporation.  (Incorporated by reference to Exhibit 10.1 to
     the  Registrant's  Quarterly Report on Form 10-Q for the period ended March
     31, 1994)

10.7(a) Guaranty dated as of October 2, 1995 by Thomas W. Itin to the Registrant
     (the "Itin  Guaranty").  (Incorporated  by reference to Exhibit 10.9 to the
     Registrant's 1995 Form 10-K)

10.7(b) Amendment  One  to the Itin  Guaranty.  (Incorporated  by  reference  to
     Exhibit  10.7(b)  to the  Registrant's  Annual  Report on Form 10-K for the
     period ended September 30, 1997 (the "1997 Form 10-K"))

10.8 Security Agreement between Ajay and its subsidiaries,  as debtors,  and the
     Registrant  and its  subsidiaries,  as secured  parties.  (Incorporated  by
     reference to Exhibit 10.8 to the 1997 Form 10-K)

21.1 List of Subsidiaries. See Item 1 in this report

27.1 Financial Data Schedule.  (Incorporated by reference to Exhibit 27.1 to the
     1997 Form 10-K)







                                       56
<PAGE>
Exhibit 10.7(b) Amendment One to the Itin Guaranty


                          AMENDMENT NO. ONE TO GUARANTY



     AMENDMENT NO. ONE, dated this 7th day of January,  1998 but effective as of
July 11, 1997,  to that  certain  GUARANTY  dated as of October 2, 1995,  by and
between  Thomas W.  Itin  ("Itin")  and  Williams  Controls,  Inc.,  a  Delaware
corporation, and its successors and assigns ("Williams").

     A. For its own benefit and that of its operating subsidiaries, Ajay Sports,
Inc. ("Ajay")  obtained  financing of up to $13.5 million under a revolving loan
agreement dated as of July 25, 1995 between Ajay and United States National Bank
of Oregon ("US Bank"),  as amended by a First  Amendment  dated as of October 2,
1995 (as amended, the "Ajay/US Bank Loan"). The Ajay/US Bank Loan was guaranteed
by each of Ajay's  operating  subsidiaries  and was secured by its inventory and
accounts then existing or thereafter acquired.


     B. On July  11,  1997,  Williams  and its  subsidiaries  and  Ajay  and its
subsidiaries  refinanced  their  bank  loans with  Wells  Fargo  Bank,  National
Association  ("Wells  Fargo")  through a joint credit facility (the "Wells Fargo
Credit Facility").

     C. In  connection  with the  above-described  financing,  Williams  and its
subsidiaries and Ajay and its subsidiaries entered into a Consent, Reaffirmation
and  Release  Agreement  dated  July 14,  1997  with US Bank  and Ajay  issued a
promissory  note in the principal  amount of $2,340,000  (the "Ajay/US Bank Term
Loans"),  payment of which was  guaranteed  directly by Itin (the  "Itin/US Bank
Guaranty")  and  Williams  and  its  subsidiaries  jointly  and  severally  (the
"Williams/US Bank Guaranty").

     D. This Amendment supplements and amends the guaranty dated October 2, 1995
which Itin previously  delivered to Williams in connection with the Ajay/US Bank
Loan and  Williams'  guaranty  delivered  in  connection  therewith,  which Itin
reaffirms as amended hereby.
 
     NOW,  THEREFORE,  Itin, as Chairman and Chief Executive  Officer of each of
Williams and Ajay and as a significant shareholder in both Williams and Ajay, in
consideration of Williams' guaranty of Ajay's obligations under the Ajay/US Bank
Term Loans, periodic advances to Ajay and for Williams jointly entering into the
Wells  Fargo   Credit   Facility   with  Ajay,   and  other  good  and  valuable
consideration,  the adequacy and receipt of which  hereby is  acknowledged,  and
intending  to be legally  bound,  the parties  hereby  amend the October 2, 1995
Guaranty of Itin as follows:

     Section 1 is deleted in its entirety and is replaced  with the following in
its stead:

     1. The Guaranty.  Itin hereby absolutely and unconditionally  guarantees to
Williams  repayment  of  the  Guaranteed  Obligations,  as  defined  below.  The
"Guaranteed Obligations" shall include all of the following:

          (a) The Market Value (as hereinafter  defined) of the 4,111,647 shares
     of Ajay  common  stock owned by Williams  (the  "Shares")  at not less than
     $1,400,000  on the date,  if any,  that Itin  first  becomes  obligated  to
     perform under this Guaranty. For purposes of this Guaranty,  "Market Value"
     shall mean the average closing bid price per share of the Ajay common stock
     as reported on the Nasdaq  National  Market,  the Nasdaq SmallCap Market or
     the OTC Bulletin Board, or if none, the National  Quotation  Bureau's "Pink
     Sheets."

          (b) Any and all amounts  Williams or its  subsidiaries are required to
     pay to US Bank upon performance under the Ajay/US Bank Term Loans.

          (c) Any and all amounts Williams has advanced,  contemplates advancing
     or is required to advance to Ajay or for which Williams  otherwise  becomes
     liable to third  parties  for the  benefit of Ajay in  connection  with the
     termination of Ajay's  Revolving Loan Agreement with US Bank dated July 25,
     1995, as amended (the "Original  Ajay/US Bank Loan") in connection with the
     Wells Fargo Credit Facility.

          (d) Any and all amounts  which  Williams,  under its joint and several
     liability  obligations  to Wells  Fargo,  ultimately  is required to pay to
     Wells Fargo under the Wells Fargo  Credit  Facility to the extent that such
     amounts  paid by  Williams  have  not  been  repaid  by  Ajay or  otherwise
     extinguished at the time this Guaranty is being called upon.

          (e) Amounts, including,  without limitation,  principal,  interest and
     reasonable  collection  costs directly  related to the  performance of Itin
     hereunder.


                                       57
<PAGE>

     Section 3 is amended by deleting the  reference  in the second  sentence to
the "Williams Guaranty" and is replaced with "the Ajay/US Bank Term Loans or any
other obligation which constitutes a Guaranteed Obligation hereunder".


     Section 4 is amended by  renumbering  subsection  (b) as subsection (d) and
adding the following new subsections (b) and (c):

          (b) upon notice (given in accordance with Section 6 hereof) by Itin to
     Williams terminating the Guaranty,  which termination shall have the effect
     of ending  Itin's  obligation  to  guaranty  any  obligations  incurred  by
     Williams  after  the  date  of  termination;   provided,  however,  that  a
     termination  under this subsection shall not terminate  Itin's  obligations
     with  respect  to  any   Guaranteed   Obligations   existing  or  otherwise
     outstanding on the date of termination under this subsection;

          (c)  automatically  upon a change of control in Williams  other than a
     voluntary  change of control by Itin;  with "control"  (including the terms
     controlling,  controlled  by an under  common  control  with)  meaning  the
     possession,  direct  or  indirect,  of the  power to  direct  or cause  the
     direction  of  management  and policies of  Williams,  whether  through the
     ownership of voting securities, by contract or otherwise; or


     Section 5 is amended by deleting the references in subsections  (d) and (f)
to the "Williams  Guaranty"  and  inserting  "the Ajay/US Bank Term Loans or any
other obligation which  constitutes a Guaranteed  Obligation  hereunder" in lieu
thereof; and by inserting "or any other third party" immediately after "US Bank"
each time that term appears in subsections (d) and (f).


     Subsection  (i) of Section 6 is amended by deleting the  reference to "Dale
J.  Nelson"  and  replacing  it with  "Gerard  A.  Herlihy"  where it appears in
subsection (i), and by changing the area code references in subsection (ii) from
"(810)" to "(248)."

     All other  provisions of the Guaranty  amended  hereby shall remain in full
force and effect without revision or amendment.

     IN WITNESS  WHEREOF,  the parties  have caused  this  Amendment  No. One to
Guaranty to be signed and delivered as of the date first above written.

                                        "ITIN"

                                        By /s/ Thomas W. Itin
                                           ----------------------------       
                                           Thomas W. Itin, Individually

                                        WILLIAMS CONTROLS, INC.


                                        By /s/ Gerard A. Herlihy    
                                           ----------------------------
                                           Gerard A. Herlihy, Chief
                                           Financial Officer




                                       58
<PAGE>


Exhibit 10.8 Security  Agreement between Ajay and its subsidiaries,  as debtors,
     and the Registrant and its subsidiaries, as secured parties.

                               SECURITY AGREEMENT




DATE:    Effective July 14, 1997

BETWEEN: AJAY SPORTS, INC., a Delaware corporation and
         AJAY LEISURE PRODUCTS, INC., a Delaware corporation
         AJAY LEISURE DE MEXICO C.V. DE S.A., a Mexicali, Mexico corporation
         PALM SPRINGS GOLF, INC., a Colorado corporation
         1501 E. Wisconsin Street
         Delavan, Wisconsin  53115
         Attention:  Thomas W. Itin

         LEISURE LIFE, INC., a Tennessee corporation
         215 4th Avenue North
         Baxter, Tennessee 38544
         Attention:  Thomas W. Itin

                                                   (collectively, the "Debtors")


AND: WILLIAMS  CONTROLS,  INC., a Delaware  corporation on its own behalf and on
     behalf of its subsidiaries,  WILLIAMS CONTROLS  INDUSTRIES,  INC.,  AGROTEC
     WILLIAMS,  INC., APTEK WILLIAMS,  INC.,  GEOFOCUS,  INC.,  HARDEE WILLIAMS,
     INC.,  KENCO  WILLIAMS,   INC.,  NESC  WILLIAMS,   INC.,   PREMIER  PLASTIC
     TECHNOLOGIES,  INC., WACCAMAW WHEEL WILLIAMS,  INC., WILLIAMS TECHNOLOGIES,
     INC.,  WILLIAMS WORLD TRADE, INC., WILLIAMS  AUTOMOTIVE,  INC. and TECHWOOD
     WILLIAMS, INC.
     14100 S.W. 72nd Avenue
     Portland, Oregon  97224
     Attention:  Gerard A. Herlihy, CFO

                                             (collectively, the "Secured Party")







                                       59
<PAGE>

1. Grant of  Security  Interest.  For  valuable  consideration,  the receipt and
sufficiency  of  which  are  hereby  acknowledged,  and to  secure  payment  and
performance of the  obligations  described in Section 2, Debtors hereby grant to
Secured Party, a security  interest in and to the following  (collectively,  the
"Collateral"):

          (a)  all  of  Debtors'  inventory   (including   finished   inventory,
     work-in-process,  and raw materials),  equipment,  machinery, furniture and
     fixtures,  vehicles,  supplies,  all accounts  (including  all rights under
     contracts  to sell or  lease  goods or  equipment  or to  render  services,
     whether  or not  earned  by  performance,  which  are not  evidenced  by an
     instrument or chattel paper), contract rights, drafts, acceptances,  notes,
     securities and other instruments,  all chattel paper,  documents,  records,
     computer  software  and  data  general   intangibles  and  other  forms  of
     receivables,  and all guaranties and securities therefor, including without
     limitation the property described below, now owned or hereafter acquired by
     Debtors, as well as the products and proceeds thereof:

               (i) any and all patents,  copyrights,  registered  and common law
          trademarks,  trade  names,  service  marks,  service  names,  slogans,
          assumed names and other similar  rights owned by Debtors or which they
          have the right to use in the conduct of their  respective  businesses,
          including, without limitation, any rights to Debtors' trade names;

               (ii) all claims,  causes of action,  and other  rights of Debtors
          that relate in any way to the ownership,  operation,  use, or lease of
          any of the Collateral;

               (iii) all rents, income, receipts,  revenues, issues, profits and
          other  income,  liens,  and security  interests of any nature to which
          Debtors may now be or shall hereafter become entitled arising from the
          Collateral; and

          (b) all equipment,  fixtures,  and goods  described on Exhibit A as it
     may from time to time be amended to include additional equipment, fixtures,
     and goods, together with all accessions,  parts, additions,  substitutions,
     and  replacements  affixed  thereto,  as well as the  products and proceeds
     thereof.

2. Obligations Secured. This Agreement is given to secure (a) performance of the
covenants and agreements  hereinafter  made, (b) payment of all indebtedness now
or hereafter owing to Secured Party by Debtors,  including,  without limitation,
performance  of the covenants  and  agreements  under (a) that certain  Consent,
Reaffirmation  and Release  Agreement  dated July 14,  1997 by and among  United
States  National  Bank of Oregon ("US Bank"),  Secured Party and Debtors and the
related  promissory note dated July 14, 1997 in the initial  principal amount of
$2,340,000 made by Ajay Sports, Inc. in favor of US Bank (collectively,  the "US
Bank  Term  Loan");  (b)  any  and  renewals  and  extensions  of the  foregoing
instruments,  whether or not  evidenced by new or  additional  instruments;  (c)
performance   of  the  covenants  and   provisions  in  all  other   agreements,
certificates,  guaranties,  or other documents executed by Debtors in connection
with the US Bank Term Loan;  (d) full  performance of Debtors' joint and several
obligations  with Secured Party under the joint credit  facility  dated July 11,
1997 by and among Wells Fargo Bank, National Association, as lender, and Debtors
and Secured Party as borrowers; (e) full performance or repayment of any and all
obligations of Debtors to Secured Party  resulting from advances,  either direct
or  indirect,  to Debtor by Secured  Party and any other  obligations  incurred,
either direct or indirect,  for the benefit of Debtors by Secured Party, and (e)
payment of all costs, expenses and reasonable attorney fees at trial, on appeal,
or in any  bankruptcy  proceeding  incurred by Secured  Party in  enforcing  the
debts,  obligations  and  liabilities  of Debtors and in  preserving,  handling,
protecting,  collecting,  foreclosing,  disposing and otherwise realizing on any
and all security therefor.

     Notwithstanding  any provision contained herein as to the rights of Secured
Party  hereunder,  Secured  Party  shall  take  no  action,  including,  without
limitation, enforcement of any of its rights with respect to the Collateral that
would be in  conflict  with or  contrary  to the  rights of either of US Bank or
Wells Fargo Bank as to the  Collateral  under the US Bank Term Loan or the Wells
Fargo Credit Facility,  it being understood and agreed by the Secured Party that
its rights  hereunder are and shall remain  subordinate to the rights of US Bank
and/or  Wells  Fargo  until  Debtors'  obligations  to them  are paid in full in
accordance  with the terms of the US Bank Term Loan and the Wells  Fargo  Credit
Facility.  



                                       60
<PAGE>

3. Warranties, Representations and Covenants of Debtors. Each Debtor represents,
warrants and covenants as follows:

          (a) Except for Permitted  Liens (as defined  below):  (i) It will keep
     its portion of the  Collateral  free and clear of any lien,  encumbrance or
     security interest;  (ii) It will not mortgage,  pledge, grant, or permit to
     exist a security interest or lien upon any of the Collateral,  now owned or
     hereafter acquired by it; (iii) It is, and as to portions of the Collateral
     it  acquires  after  the date  hereof,  it will be,  the sole  owner of the
     Collateral, free from any adverse lien, security interest, or adverse claim
     of any kind  whatsoever,  except for claims of persons  claiming solely by,
     through or under Secured Party.  "Permitted  Liens" means (i) liens arising
     by operation of law for taxes,  assessments or governmental charges not yet
     due;   (ii)   statutory   liens  of   mechanics,   materialmen,   shippers,
     warehousemen,  carriers and other similar persons for services or materials
     arising in the  ordinary  course of business  for which  payment is not yet
     due; (iii)  non-consensual  liens incurred or deposits made in the ordinary
     course of business in connection with workers'  compensation,  unemployment
     insurance  and other  types of  social  security;  (iv)  liens for taxes or
     statutory liens of mechanics, materialmen, shippers, warehousemen, carriers
     and other similar  persons for services or materials  which are due but are
     being  contested in good faith and by  appropriate  and lawful  proceedings
     promptly  initiated  and  diligently   conducted  and  for  which  reserves
     satisfactory  to Secured Party have been  established;  (v) liens listed on
     Schedule I, (vi) liens in favor of Secured  Party;  (vii) liens in favor of
     United States  National Bank of Oregon;  and (viii) liens in favor of Wells
     Fargo Bank, National Association created in connection with the Wells Fargo
     Credit Facility.  No financing statement or other instrument  affecting the
     Collateral,  or rights  therein,  bearing the  signature  of, or  otherwise
     authorized  by, Debtor is on file in any public filing  office,  other than
     those giving rise to Permitted  Liens.  Debtor will notify Secured Party of
     any claim or demand  against the  Collateral and will defend the Collateral
     against all claims and demands of all persons at any time claiming the same
     or any interest  therein,  other than those persons whose claims or demands
     are based on Permitted  Liens, and other than those persons claiming solely
     by, through or under Secured Party.

          (b)  Debtors'  equipment  and  inventory  are located in the States of
     Wisconsin and Tennessee and/or in Mexicali, Mexico. Each Debtor will notify
     Secured  Party in the event it opens  places of business in other states or
     comes to have  Collateral  located in other states.  The  Collateral is not
     used or bought for personal, family or household purposes.

          (c)  Debtors'  principal  place of business  is in Delavan,  Wisconsin
     except that Debtor  Leisure  Life,  Inc.'s  principal  place of business is
     located in Baxter,  Tennessee  and Debtor  Ajay  Leisure De Mexico  C.V. de
     S.A.'s principal place of business is in Mexicali,  Mexico. Debtor will not
     move its principal place of business outside its present  location.  Debtor
     will not do business under any assumed business names except those of which
     Debtor has notified  Secured  Party in writing of the adoption or change of
     any assumed business name, and will, upon request of Secured Party, execute
     any  additional  financing  statements or other  certificates  necessary to
     reflect the adoption or change in such name or names.

          (d) Debtor will not sell, lease,  transfer or otherwise dispose of any
     interest in any Collateral  (other than in the ordinary course of business)
     without the prior written consent of Secured Party.

          (e) Debtor will keep the Collateral in good condition and repair,  and
     will not  misuse,  abuse,  destroy,  or allow to  deteriorate  or waste the
     Collateral  or any part  thereof,  except for ordinary wear and tear of its
     normal and  excepted use in Debtor's  business.  Debtor will not use any of
     the Collateral in violation or any  governmental  law, rule, or regulation.
     Secured Party or its designee may examine and inspect the Collateral at all
     reasonable times,  wherever located,  and for that purpose is authorized by
     Debtor to enter any place or places  where any part of the  Collateral  may
     be.




                                       61
<PAGE>

          (f) Debtor will keep the  Collateral  fully  insured  against  loss or
     damage by fire, theft, collision, and such other hazards.

          (g) Debtor will pay promptly  when due all taxes,  license  fees,  and
     assessments  on the  Collateral.  Debtor may  withhold  payment of any tax,
     license fee, or assessment in connection with a good faith dispute over the
     obligation to pay, so long as Secured Party's interest in the Collateral is
     not  jeopardized.  If a lien arises or is filed as a result of  nonpayment,
     Debtor  shall  within 20 days after the lien arises or, if a lien is filed,
     within 15 days after Debtor has notice of the filing,  secure the discharge
     of the lien or deposit  with Secured  Party cash or a sufficient  corporate
     surety bond or other  security  satisfactory  to Secured Party in an amount
     sufficient  to discharge the lien plus any costs,  attorney  fees, or other
     charges  that could accrue as a result of a  foreclosure  or sale under the
     lien.

          (h) Debtor will promptly  execute any document,  alone or with Secured
     Party,  procure any document,  give any notices, do all other acts, and pay
     all costs  associated with the foregoing that Secured Party  determines are
     necessary to protect the Collateral  against rights,  claims or interest of
     third parties  (except those arising from Permitted Liens or those claiming
     solely by, through or under Secured Party) and will otherwise  preserve the
     Collateral as security hereunder.

          (i) Debtor will not assert against  Secured Party any claim or defense
     which  Debtor  may have  against  any  other  person  with  respect  to the
     Collateral or any part thereof.

          (j) Until foreclosure,  Debtor will indemnify, defend and hold Secured
     Party  harmless  from and against  any loss,  liability,  damage,  cost and
     expense whatsoever arising from the use, operation, ownership or possession
     of the Collateral or any part thereof.

          (k) Debtor shall promptly replace any material loss, theft,  damage or
     destruction  of any  Collateral;  provided that if all  insurance  proceeds
     covering such loss,  theft,  damage or destruction are promptly  applied to
     the reduction of indebtedness  under the Note, then such failure to replace
     shall not constitute an Event of Default.

          (l) At such time as the US Bank Term Loans are repaid and the security
     interests and financing statements related thereto are terminated,  Debtors
     promptly will deliver to Secured Party all appropriate financing statements
     and such other  documents or  instruments  as Secured Party may  reasonably
     request to perfect  the  Security  Interest  created  hereby  which will be
     subordinate only to the security  interests  granted in connection with the
     Wells Fargo Credit Facility.

4.  Preservation  of Collateral by Secured Party. If Debtors should fail to make
any payment, perform or observe any other covenant,  obligation or agreement, or
take any other action which  Debtors are obligated  hereunder to make,  perform,
observe, take or do, then Secured Party may, at Secured Party's sole discretion,
without notice to or demand upon Debtors and without  releasing Debtors from any
obligation,  covenant,  or agreement hereof, make, perform,  observe, take or do
the same in such manner and to such extent as Secured  Party may deem  necessary
to protect the security interest in or the value of the Collateral. Furthermore,
Secured  Party,  in its sole  discretion,  may  commence,  appear  or  otherwise
participate  in any action or proceeding  purporting to affect  Secured  Party's
security  interest  in or the value or  ownership  of the  Collateral.  All sums
expended or incurred by Secured Party  pursuant to the foregoing  authorizations
(including  reasonable  attorney  fees) shall be secured hereby and shall be due
and payable  within ten days after demand and shall bear  interest from the date
of expenditure  until the date of  reimbursement  at two percent above the prime
lending rate of Wells Fargo Bank, National Association.



                                       62
<PAGE>
5. Use of  Collateral  by  Debtor.  So long as no Event of  Default  shall  have
occurred,  Debtors may have possession of the Collateral (other than instruments
delivered  to  Secured  Party  pursuant  to  this  Agreement)  and  may  use the
Collateral in any lawful  manner not  inconsistent  with any other  agreement or
policy of insurance which affects the Collateral. Secured Party acknowledges and
agrees that any buyer in the ordinary course of Debtors'  businesses  takes free
of Secured Party's security interest.

6.  Events  of  Default.  TIME IS OF THE  ESSENCE.  Any of the  following  shall
constitute an event of default under this Agreement ("Event of Default"):

          (a) An Event of Default shall occur under this Agreement,  the US Bank
     Term Loans or any other agreement to which Debtors are party;

          (b) Secured Party  receives any evidence that any Debtor has taken any
     action  that is  contrary  to its  grant to  Secured  Party  of a  security
     interest in the Collateral, and such default is not remedied within 20 days
     after notice to Debtor by Secured Party;

          (c) Debtor fails to perform or observe any covenant,  agreement, term,
     or promise contained herein or in any other agreement with Secured Party to
     which Debtor is a party, and such performance or observance is not remedied
     within 20 days from the  earlier  of the time an  officer  or  director  of
     Debtor obtains actual  acknowledge  thereof or notice from Secured Party or
     the Banks;

          (d) Any representation,  warranty,  or statement made herein proves to
     have been false or misleading in any material  respect as of the time made;
     or

          (e) Material loss,  theft,  destruction or disappearance of, or damage
     to, the  Collateral,  and such Collateral is not replaced within 20 days of
     such event (or such  additional  time as may be  necessary  to replace such
     Collateral  by the  exercise  of  reasonable  diligence)  or all  insurance
     proceeds  covering such loss,  theft,  destruction or disappearance are not
     promptly  applied to the reduction of any  indebtedness  to US Bank,  Wells
     Fargo or Secured Party, as appropriate.

7. Remedies Upon Default.

          (a) Upon the occurrence of any Event of Default, Secured Party may, at
     its option and in addition to any other  remedies  provided by law, in this
     Agreement or in any other agreement with Secured Party to which Debtor is a
     party, do any one or more of the following, successively or concurrently:

               (i) Declare all indebtedness secured hereby to be immediately due
          and payable.

               (ii)  Either  personally,  or  by  means  of  a  court  appointed
          receiver,  take possession of all or any of the Collateral and exclude
          therefrom   Debtors  and  all  others  claiming  under  Debtors,   and
          thereafter hold,  store,  use, operate,  manage,  lease,  maintain and
          control  the  Collateral,  make  repairs,  replacements,  alterations,
          additions and  improvements  to the Collateral and exercise all rights
          and  powers of Debtors  with  respect  to the  Collateral  or any part
          thereof.  Debtors hereby  expressly waive any requirement that Secured
          Party or the receiver  post a bond upon such  appointment.  If Secured
          Party demands or attempts to take  possession of the Collateral in the
          exercise of any rights under this  Agreement,  Debtors shall turn over
          promptly and deliver complete possession thereof to Secured Party.

               (iii)  Without  notice  to or  demand  upon  Debtors,  make  such
          payments  and do such  acts as  Secured  Party may deem  necessary  to
          protect Secured Party's security interest in the Collateral, including
          without limitation, (1) paying, purchasing, contesting or compromising
          any  encumbrance,  charge or lien which is prior to or superior to the
          security interest granted hereunder, and in exercising any such powers
          or authority to pay all expenses incurred in connection therewith, and
          (2)  in   exercising   its  rights  under  this  Section  7,  collect,
          compromise,  endorse,  sell,  or  otherwise  deal with  Collateral  or
          proceeds  thereof in its own name or that of Debtors,  with full power
          to endorse any certificates of title.


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<PAGE>

               (iv)  Require  Debtors to deliver to Secured  Party all  original
          documents,  drafts, acceptances,  notes, securities, other instruments
          and chattel paper. If any of the chattel paper covers property that is
          covered by certificates of title, then Debtors shall also deliver such
          certificates.

               (v) Require  Debtors to assemble the  Collateral,  or any portion
          thereof,  at a  place  designated  by  Secured  Party  and  reasonably
          convenient to both parties, and promptly to deliver such Collateral to
          Secured  Party or its  designee.  Secured  Party,  and its  agents and
          representatives and designees,  shall have the right to enter upon any
          or all of Debtors'  premises and property to exercise  Secured Party's
          rights thereunder.

               (vi) Notify account debtors or lessees of any Collateral that the
          Collateral has been assigned to Secured Party and the proceeds,  lease
          payments,  or other  payments  thereon shall be paid to Secured Party.
          Upon  request of Secured  Party,  Debtors  will also  promptly  notify
          account  debtors and will indicate on all billings to account  debtors
          that the  accounts  are payable to Secured  Party,  and will  promptly
          notify  lessees of Collateral  that all lease  payments are payable to
          Secured  Party.  Any and all proceeds  thereafter  received by Debtors
          shall be turned over to Secured Party daily in the exact form in which
          they are received.

               (vii)  Foreclose on the  Collateral as herein  provided or in any
          manner  permitted by law,  and exercise any and all lawful  rights and
          remedies conferred upon Secured Party by Debtor in connection with the
          indebtedness  secured hereby,  either concurrently or in such order as
          Secured  Party  may  determine;  and  sell or cause to be sold in such
          order as Secured Party may determine, as a whole or in such parcels as
          Secured Party may determine,  the Collateral  without affecting in any
          way other rights or remedies to which Secured Party may be entitled.

               (viii) Sell,  lease or  otherwise  dispose of the  Collateral  at
          public sale,  without  having the Collateral at the place of sale, and
          upon terms and in such manner as Secured Party may determine.  Secured
          Party, or any Debtor may be a purchaser at any sale.

               (ix)  Exercise any remedies of a secured  party under the Uniform
          Commercial Code of Wisconsin  and/or  Tennessee and of any other state
          in which Collateral is located.

          (b)  Unless the  Collateral  is  perishable  or  threatens  to decline
     rapidly in value or is of a type customarily  sold on a recognized  market,
     Secured Party shall give Debtor at least ten days' prior written  notice of
     the time and place of any  intended  public sale or of the time after which
     any intended  private sale or other  disposition of the Collateral is to be
     made, which notice shall be deemed reasonable.

          (c) In the event of a public or private  sale of the  Collateral,  the
     proceeds, after payment therefrom of Secured Party's reasonable expenses of
     sale,  reasonable  attorney  fees and  other  legal  expenses  incurred  in
     connection  therewith,  shall be applied in satisfaction of the obligations
     secured hereby, and any surplus remaining shall be paid by Secured Party to
     Debtor. If proceeds applied to such obligations are insufficient to pay the
     same in full,  Debtors  shall  be  jointly  and  severally  liable  for any
     deficiency  and  shall  promptly  pay  the  same  to  Secured  Party.   Any
     repossession  or retaking or sale of the  Collateral  pursuant to the terms
     hereof  shall not  operate to  release  Debtors  until full  payment of any
     deficiency has been made in cash.


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8. Payment of Costs of  Collection.  In case of an Event of Default,  or in case
litigation is commenced to enforce or construe any term of this Agreement or any
other instrument  evidencing  indebtedness of Debtors to Secured Party or of any
other document or agreement executed hereunder, the losing party will pay to the
prevailing  party  such  amounts  as shall be  sufficient  to cover the cost and
expense of collection or enforcement,  including, without limitation, reasonable
attorney's fees and costs at trial, on appeal, and in any bankruptcy proceeding.

9. Power of Attorney.  Debtors do hereby  irrevocably  appoint  Secured Party as
their attorney-in-fact,  with full power of substitution, upon the occurrence of
an Event of Default, to execute any document or instrument, including any proofs
of claim, to endorse any draft or other  instrument for the payment of money, to
execute releases, to negotiate settlements,  to cancel any insurance referred to
herein and to do all other  things  necessary or required to effect a settlement
under any  insurance  policy or to take any action or perform any  obligation or
enforce any right with respect to the Collateral Debtors would have the right or
power to do,  all of which  actions  may be taken in Secured  Party's  own name.
Secured Party agrees to give Debtors notice of any actions it has taken pursuant
to its  appointment  as  attorney-in-fact  within a  reasonable  time after such
action is taken,  it being  understood that the failure to give such notice will
not revoke Secured  Party's  appointment as  attorney-in-fact  or invalidate any
actions taken in such  capacity.  This power of attorney is a power coupled with
an interest  which cannot be revoked  until  payment in full of the whole amount
then due and unpaid of the indebtedness of Debtor to Secured Party.

10. Miscellaneous.

          (a) Notices. All notices or other communications required or permitted
     hereunder shall be given to the  appropriate  party or parties and shall be
     effective as provided in the Wells Fargo Credit Facility;  provided,  that,
     notices  given to or by US Bank shall be given as  provided  in the US Bank
     Term Loan.

          (b)  Remedies  Cumulative.  Any  and  all  remedies  herein  expressly
     conferred  upon  Secured  Party  shall be  deemed  cumulative  with and not
     exclusive of any other remedy  conferred hereby or by law on Secured Party,
     and the  exercise of any one remedy  shall not preclude the exercise of any
     other.

          (c)  Waiver.  Secured  Party  shall not be deemed to have  waived  any
     power,  right or remedy  under  this or any  other  agreement  executed  by
     Debtors unless the waiver is in writing  signed by Secured Party.  No delay
     in exercising  Secured Party's power, right or remedy shall be a waiver nor
     shall a waiver on one occasion operate as a waiver of such power,  right or
     remedy on a future occasion.

          (d)  Further  Assurances.  Debtors  will  join with  Secured  Party in
     executing,  filing and doing whatever may be necessary under applicable law
     to perfect and continue Secured Party's security interest in the Collateral
     now owned or hereafter acquired by Debtors, all at Debtors' expense.

          (e) Attorneys  Fees. If Secured Party exercises its rights or remedies
     under this Agreement or under the Uniform Commercial Code, Debtor agrees to
     pay all costs,  expenses and reasonable attorney fees as the trial court or
     any appellate  court may adjudge  reasonable in any matter  arising from or
     related to this Agreement,  including  claims and adversary  proceedings in
     bankruptcy.

          (f)  Successors  and Assigns.  This  Agreement  may not be assigned by
     Debtors without the prior written consent of Secured Party.  This Agreement
     shall be binding  upon and shall  inure to the  benefit of the  parties and
     their permitted  respective  successors and assigns. The US Bank Term Loans
     constitute a separate instrument and may be negotiated, extended or renewed
     by Secured Party without releasing Debtor, the Collateral, or any guarantor
     or co-maker.

          (g) Validity; Severability. If any provision of this Agreement is held
     to be invalid, such event shall not affect, in any respect whatsoever,  the
     validity of the remainder of this  Agreement,  and the  remainder  shall be
     construed  without the invalid  provision  so as to carry out the intent of
     the parties to the extent possible without the invalid provision.



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<PAGE>
          (h) Exhibits and Schedules. Any exhibits or schedules attached to this
     Agreement and referred to herein are  incorporated  in this Agreement as if
     they were fully set forth in the text hereof.

          (i) Governing Law. This  Agreement  shall be governed by and construed
     under the laws of the State of Oregon.

          (j) Counterparts;  Hearings. This Agreement may be executed in several
     counterparts,  each  of  which  shall  be  deemed  an  original,  but  such
     counterparts  shall  together  constitute  but one and the same  Agreement.
     Section  headings  in  this  Agreement  are  inserted  for  convenience  of
     reference only and shall not constitute a part hereof.

          (k) Amendment.  This agreement can be modified or terminated only by a
     writing signed by Secured Party and Debtors.

          (l) Term of Security  Agreement.  This Agreement  shall remain in full
     force and effect as long as any  indebtedness  of Debtors to Secured  Party
     remains unpaid or outstanding.

          (m) Capitalized Terms. Capitalized terms not defined herein shall have
     the respective  meanings  ascribed thereto in the US Bank Term Loans or the
     Wells Fargo Credit Facility.

          (n) Include. The terms "include," "including," and similar terms shall
     be construed as if followed by the phrase "without limitation."

          IN  WITNESS  WHEREOF,  the  parties  hereto  have duly  executed  this
     Agreement as of the date first above written.

          
                                        SECURED PARTY:

                                        WILLIAMS  CONTROLS,   INC.,  a  Delaware
                                        corporation,  on its own   behalf and as
                                        agent  on  behalf  of  its subsidiaries,
                                        Williams  Controls  Industries,  Agrotec
                                        Williams, Inc.,  Aptek Williams,   Inc.,
                                        GeoFocus, Inc.,  Hardee  Williams, Inc.,
                                        Kenco Williams,  Inc.,   NESC  Williams,
                                        Inc., Premier Plastic Technologies,Inc.,
                                        Waccamaw Wheel Williams,  Inc., Williams
                                        Technologies,   Inc.,   Williams   World
                                        Trade, Inc.,  Williams Automotive,  Inc.
                                        and Techwood Williams, Inc.


                                        By /s/ Gerard A Herlihy
                                        --------------------------
                                        Gerard A. Herlihy, CFO

                                        




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                                        DEBTORS:

                                        AJAY SPORTS, INC.


                                        By   /s/ Duane R. Stiverson
                                             ---------------------------
                                             Duane R. Stiverson
                                             Chief Financial Officer

                                             AJAY LEISURE PRODUCTS, INC.


                                        By  /s/ Duane R. Stiverson
                                            ---------------------------
                                            Duane R. Stiverson
                                            Chief Financial Officer

                                            LEISURE LIFE, INC.


                                        By  /s/ Duane R. Stiverson
                                            ---------------------------
                                            Duane R. Stiverson
                                            Chief Financial Officer

                                            PALM SPRINGS GOLF, INC.


                                        By  /s/ Duane R. Stiverson
                                            ---------------------------
                                            Duane R. Stiverson
                                            Chief Financial Officer


                                            AJAY LEISURE de MEXICO D.V. de S.A.


                                        By  /s/ Clarence H. Yahn
                                            ---------------------------
                                            Clarence H. Yahn
                                            Sole Administrator






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